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TMI Blog2010 (10) TMI 1187X X X X Extracts X X X X X X X X Extracts X X X X ..... ations 3(a), 3( b), 3(c), 4(1), 4(2)(a) and 4(2)( b) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (FUTP Regulations) and Regulations 7A(1), (2), (3) and (4) of the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (Stock Brokers Regulations) is the short question that arises for our consideration in the appeals filed by the stock brokers. 3. F O contracts are traded in the derivative segment of the Indian Capital Market. Derivatives are actually financial instruments whose values are derived from the other, more basic, underlying variables like the share price of a particular scrip in the cash segment of the market or the stock index of a portfolio of stocks. Derivative trade is governed by section 18A of the Securities Contracts Regulation Act, 1956 which was recently inserted with effect from 22-2-2000 and is legal only when such contracts are traded on a recognized stock exchange and settled through the clearing house of that exchange. Futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be collected by the broker from the concerned client. The brokers are exposed to regulatory action if they fail to ensure adequate margins from their constituents. Unlike an options contract, both the buyer and the seller have potential to make unlimited gains or losses. The parties in the futures contract have the flexibility of closing out the contract prior to its maturity by squaring off the transaction in the market by closing the contract. Alternatively, a reverse position can also be taken i.e., a buyer can take a sale contract for the same scrip/contract for the same quantity, in which case, his obligation is squared off and he will only get the difference between the buy and sell price. It must be remembered that in F O segment, only a contract is traded without involving any delivery of the underlying asset or change of beneficial ownership of the asset and all trades are settled in cash through the exchange mechanism. 5. The Board had been watching the nature of transactions occurring in derivative segment of capital market and a perusal of trading data of the F O segment in NSE for the period January to March, 2007 revealed that the brokers were buying and selling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled reply denying its involvement in any manipulative trade in the F O segment and detailing the steps it had taken to check suspicious trades in that segment including issuing necessary instructions to its employees to detect certain specified red alerts and sanitise the system against them and also to the clients cautioning them to desist from raising such alerts. The adjudicating officer, after considering the facts and circumstances of the case and the submissions advanced by the appellant and the material available on record, held the appellant guilty of aiding and abetting its clients in executing synchronized/matched/reverse trades in the F O segment in violation of the provisions of FUTP Regulations and Stock Brokers Regulations and by his order dated 25-2-2009, a monetary penalty of ₹ 15,00,000 was imposed on the appellant. The present appeal is directed against this order as also the ad interim ex parte order dated 18-6-2007 qua the appellant. 6. Shri P.N. Modi, the learned counsel for the appellant and Shri Kumar Desai, the learned counsel for the Board took us extensively through the records of the case in particular and trading patterns in F O segment in gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment came up for our consideration in Rakhi Trading (P.) Ltd.'s case (supra) and we held that they need not necessarily move in consonance with each other. For the reasons recorded in Rakhi Trading (P.) Ltd.'s case (supra) we hold that the trades impugned in this case cannot be described as manipulative on this ground. Again, the question of reversal of trades where one party continuously books profits and the other continuous losses came up for our consideration in Rakhi Trading (P.) Ltd.'s case (supra) and we have held that such trades were executed for the purpose of tax planning and do not violate any rule of the game nor do they affect the market much less manipulate it. The gravamen of the charge(s) levelled against the appellant in paragraph 2 of the show-cause notice dated 5-10-2007 read with Annexure A thereto is as under :- SEBI conducted an examination into the dealings in the futures and options segment of NSE, during the period from January to March, 2007. It is alleged on the basis of the findings of the examination report that during the said period, you had executed non-genuine transactions in collusion with certain clients and brokers in the futures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute fraudulent transactions. Having heard the learned counsel for the parties and after going through the record we are satisfied that this link is missing. There is no material on record to show that the appellant as a broker knew that the trades were fictitious or that the buyer and the seller were the same persons. Trading was through the exchange mechanism and was online where the code number of the broker alone is known and the learned counsel for the parties are agreed that it is not possible for anyone to ascertain from the screen as to who the clients were. This is really a unique feature of the stock exchange where, unlike other moveable properties, securities are bought and sold between the unknowns through the exchange mechanism without the buyer or the seller ever getting to meet. Therefore it was not possible for the broker to know who the parties were. Merely because the appellant acted as a broker cannot lead us to the conclusion that it must have known about the nature of the transaction. There has to be some other material on the record to prove this fact. The Board could have examined someone from KIL to find out whether the appellant knew about the nature of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lients has been established, let alone any relation with the counter-parties or the counter-party brokers. Moreover, the appellant executed only 23 trades on behalf of 15 clients with a total close out difference of ₹ 35.44 lakhs (positive) which have been called in question. Having regard to the fact that the appellant had executed 1,69,71,078 trades for 1,21,306 clients with a turnover of ₹ 1,11,659 crores during the investigation period we are of the view that in terms of materiality and substance this minuscule number of trades done on behalf of 15 clients were not likely to raise any alarm for the appellant with a client base of over 4,70,000 clients. In these circumstances, we cannot hold the appellant liable for the impugned trades. 8. The other additional reason for which we cannot hold the appellant liable is that out of the 23 impugned trades that it executed on behalf of its clients, 17 were executed directly by the clients through the Internet. NSE by its circular of 24-8-2000 has set detailed guidelines on Internet based trading through order routing system which route client orders to the exchange trading system and the software for this service has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contracts executed by the appellant therein were not manipulative or fictitious as alleged. For the detailed reasons recorded in our order of 11-10-2010 the charge against the appellant who was the broker in these transactions must also fail. The transactions undertaken by the appellant on behalf of other clients are squarely covered by the facts and circumstances in the case of Indiabulls Securities Ltd., the appellant in Appeal No. 51 of 2009. Whatever has been said hereinabove in Appeal No. 51 of 2009 equally applies to the case of the appellant in this appeal. We, therefore, hold that the appellant committed no market irregularity and the charges levelled against him as a broker for executing the impugned trades in the F O segment cannot be sustained. Appeal No. 168 of 2009. 11. The appellant herein is another broker who is alleged to have executed 56 non-genuine reverse transactions with an aggregate COD of ₹ 33.6 lakhs in 43 stock options in collusion with certain clients and brokers. The adjudicating officer by his impugned order dated 22-5-2009 has imposed a monetary penalty of ₹ 3 lakhs for violating FUTP Regulations and the code of conduct prescribed for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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