SECURITIES & EXCHANGE BOARD OF INDIA Vs. KISHORE R.AJMERA
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 2818 of 2008, Judgment Date: Feb 23, 2016
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 2818 OF 2008
Securities and Exchange Board of India ...Appellant (s)
Versus
Kishore R. Ajmera ...Respondent (s)
WITH
CIVIL APPEAL NO.8769 OF 2012
CIVIL APPEAL NO.6719 OF 2013
CIVIL APPEAL NO.252 OF 2014
CIVIL APPEAL NO.282 OF 2014
J U D G M E N T
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 of Fraudulent and Unfair Trade Practices Relating to
Securities Market) Regulations and/or liable for violating the Code of
Conduct specified in Schedule II read with Regulation 9 of the Securities
and Exchange Board of India (Stock-Brokers and Sub-Brokers) Regulations,
1992? (hereinafter referred to as the ‘Conduct Regulations, 1992’).
3. At the outset facts of each case on which the above question of law
have arisen may be taken specific note of.
Civil Appeal No. 2818 of 2008 (SEBI Vs. Kishore R. Ajmera)
The respondent-Kishore R. Ajmera is a broker registered with the
Bombay Stock Exchange. M/s. Prakash Shantilal & Company is one of the sub-
brokers through whom the two clients, namely, Mayekar Investments Pvt. Ltd.
and M/s. K.P. Investment Consultancy are alleged to have indulged in
matching trades thereby creating artificial volumes in the scrip of one
Malvica Engineering Ltd. (MEL) during the period 20.12.1999 to 31.3.2000
and 7.8.2000 to 31.8.2000. The gravamen of the allegations levelled
against the sub-broker for which the respondent has been held to be
vicariously liable is that during the aforesaid period the two clients, who
are related to each other through majority shareholding in the hands of
common family members, had through the sub-broker bought 66,300 shares and
sold 77,700 shares of MEL during the first period and a total of 32,500 and
28,800 shares of MEL, respectively, during the second period. Not only
both the clients were related but they were also beneficiaries of the
allotment of the shares made directly by the parent company i.e. MEL. The
said allotment incidentally was made out of the shares that were forfeited
on account of failure to pay call money by the allottees, following a
public offer. The scrip in question was a illiquid scrip where the volume
of trading is normally minimal. A note of caution had also been struck by
the Bombay Stock Exchange by circulating an advice requiring brokers to be
aware of any unnatural (voluminous) trading in any such illiquid scrip.
Yet, the transaction in question was gone through by the sub-broker acting
through the terminal of the broker i.e. respondent-Kishore R. Ajmera. It
is on the said facts that charges of negligence, lack of due care and
caution were levelled against the sub-broker and in turn against the
broker.
The said charges were found to be proved after holding a due enquiry 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 direct proof or evidence showing the involvement
of the sub-broker in allegedly matching the trades and thereby creating
artificial volumes of trading resulting in unnatural inflation of the price
of the scrip, the charges are not substantiated. The penalty imposed was
accordingly interfered with. It is against the said order that the SEBI has
filed the present appeal under Section 15Z of the SEBI Act.
Civil Appeal No.6719 of 2013 (SEBI Vs. Ess Ess Intermediaries Pvt. Ltd.),
Civil Appeal No.252 of 2014 (SEBI Vs. M/s. Rajendra Jayantilal Shah, Civil
Appeal No.282 of 2014 (SEBI Vs. M/s. Rajesh N. Jhaveri)
5. The scrip involved in these appeals is one of M/s. Adani Export Ltd.
(AEL) and the period of investigation involved is 09.07.2004 to 14.01.2005
and 08.08.2005 to 09.09.2005. The respondents are all sub brokers who are
alleged to have synchronized trades in respect of a huge number of shares
during the periods in question. The volume of shares traded during the two
periods in questions is best evident from the following extracts of the
orders of the Whole Time Member passed in each of the cases.
ESS ESS INTERMEDIARIES PVT. LTD.
“During the course of the said investigation, it was observed that the
Noticee was one of the sub-brokers who had traded substantially in the
scrip of AEL during the first and the second period for the said client.
The Noticee, for the said client, has allegedly executed synchronized
trades for 1,15,870 shares of AEL during the period from July 9, 2004 to
July 27, 2004. Further, the said client also entered into self trades for
52,910 shares. The said client also entered into structured trades wherein
he reversed the trades with particular clients of other brokers. A total
trading of 1,29,422 shares was executed by the said client in such manner
between July 16, 2004 and July 27, 2004. This quantity accounted for 12.5%
of the total traded quantity during this period. It is further observed
that during the period between July 28, 2004 to January 14, 2005 the said
client is alleged to have entered synchronized trading for buying 83,45,924
shares and selling 87,60,410 shares. The said client was part of the group
which executed trades of 3,48,53,139 shares during the above period which
is around 51% of total traded volumes. Of these trades 3,04,68,762 shares
(87.39% of their trades) appear to be synchronized.
It is 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 sub-brokers 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 synchronized trades for 1,17,601
shares of AEL during the period from July 9, 2004 to July 27, 2004. The
said client also entered into structured trades wherein he reversed the
trades with particular clients of other brokers. It was observed that
during the period between July 28, 2004 to January 14, 2005 the said client
is alleged to have entered synchronized trading for buying 66,20,117 shares
and selling 67,44,545 shares. The said client was part of the group which
executed trades of 3,48,53,139 shares during the above period which is
around 51% of total traded volumes. Of these trades 3,04,68,762 shares
(87.39% of their trades) appear to be synchronized.”
M/S. RAJESH N. JHAVERI
“During the course of the said investigation, it was observed that the
Noticee was one of the sub-brokers 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 synchronized trades for 1,15,870
shares of AEL during the period from July 9, 2004 to July 27, 2004. The
said client was part of the group which executed trades of 3,48,53,139
shares during the above period which is around 51% of total traded volumes.
Of these trades 3,04,68,762 shares (87.39% of their trades) appear to be
synchronized.”
6. It is further alleged that in respect of all the transactions buy and
sell orders were placed within a time gap of 0 to 60 seconds. The volume
of trading in the illiquid scrip being very high and the sequence of the
buy and sell orders being in quick succession of time, the respondents have
been held guilty of contravening Regulations 4(1), 4(2)(a), 4(2)(b),
4(2)(e), 4(2)(g) and 4(2)(n) of the FUTP Regulations, 1995 and also the
provisions of the Code of Conduct Regulations, 1992. Accordingly, monetary
penalty of Rs.9,00,000/- for violation of FUTP Regulations, 2003 and
Rs.1,00,000/- for violation of the Code of Conduct Regulations have been
imposed.
7. In appeal, the Tribunal by the impugned order dated 19.06.2013 had
taken the view that the allegations of fraud under the FUTP Regulations,
2003 can be established only on the basis of clear, unambiguous and
unimpeachable evidence which is not available in the instant case.
Accordingly, the penalty imposed under the FUTP regulations had been
interfered with by the learned Tribunal while the penalty for violation of
the provisions 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 established by the order
dated 27.12.2011 of the Whole Time Member of SEBI. Holding the respondent
liable for contravention of Regulations 4(a), 4(b), 4(c) and 4(d) of the
FUTP Regulations 1995 and the Code of Conduct Regulation, 1992, suspension
of membership of the respondent for a period of one month had been ordered.
The said findings and the penalty imposed have been reversed by the
learned Tribunal by the impugned order dated 19.06.2012 giving rise to the
instant appeal at the instance of the SEBI.
10. There are certain relevant facts which have to be taken note of with
regard to the present case, at this stage.
(i) Circular and synchronized trading per se is not prohibited and in
fact is regulated by the SEBI regulations in force.
(ii) The client Indumati Goda though required under the relevant norms had
not appeared before the respondent at the time of registration for opening
an account. The required documents were submitted by one Shri Shirish Shah
on his behalf.
(iii) Though proceedings had been initiated against Smt. Indumati Goda she
has been exonerated of all charges levelled in respect of the transactions
in question.
(iv) Proceedings against Shri Shirish Shah had also been initiated and in
the said proceedings Shri Shah had been found liable and had been
appropriately dealt with.
(v) The circular trading involved four brokers and in respect of two of
them, monetary penalty has been imposed. The third broker in respect of
whom suspension has been ordered has not challenged the penalty imposed.
(vi) The modus operandi of the circular trading involved commencement of
trading on a particular day by a sale made by one broker to a second and
continuation of such sale in a circular manner until at the end of the day
the same or substantially the same number of shares would come back to the
first broker who had initiated the sale. This went on for 38 days.
(vii) The time difference between buy and sell orders was 0 to 60 seconds
in most cases.
11. It is on these facts that after due enquiry and compliance with the
laid down procedure that the findings of liability have been recorded and
penalty imposed, as noticed above. In appeal, the learned Tribunal took
the view, as in the earlier cases, that there is no direct material to show
that the respondent sub-broker was aware of the identity of the client on
whose behalf the transactions 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 therefrom had not
been furnished to the respondent; so also the statements of Smt. Indumati
Goda and Shri Shirish Shah and that the same had caused prejudice to the
respondent.
RELEVANT PROVISIONS OF THE SEBI ACT AND THE REGULATIONS
14. Section 12-A contained in Chapter V-A of the SEBI Act deals with
“Prohibition of manipulative and deceptive devices, insider trading and
substantial acquisition of securities or control” and reads as follows :
“12-A. Prohibition of manipulative and deceptive devices, insider trading
and substantial acquisition of securities or control.—No person shall
directly or indirectly—
(a) use or employ, in connection with the issue, purchase or sale of any
securities listed or proposed to be listed on a recognised stock exchange,
any manipulative or deceptive device or contrivance in contravention of the
provisions of this Act or the rules or the regulations made thereunder;
(b) employ any device, scheme or artifice to defraud in connection with
issue or dealing in securities which are listed or proposed to be listed on
a recognised stock exchange;
(c) engage in any act, practice, course of business which operates or
would operate as fraud or deceit upon any person, in connection with the
issue, dealing in securities which are listed or proposed to be listed on a
recognised stock exchange, in contravention of the provisions of this Act
or the rules or the regulations made thereunder;
(d) engage in insider trading;
(e) deal in securities while in possession of material or non-public
information or communicate such material or non-public information to any
other person, in a manner which is in contravention of the provisions of
this Act or the rules or the regulations made thereunder;
(f) acquire control of any company or securities more than the percentage
of equity share capital of a company whose securities are listed or
proposed to be listed on a recognised stock exchange in contravention of
the regulations made under this Act.”
15. Section 15-HA of the Act which deals with penalty for fraudulent and
unfair trade practices and Section 15J which lay down the factors to be
taken into account while adjudging the quantum of penalty reads as follows
:
“15-HA. Penalty for fraudulent and unfair trade practices.—If any person
indulges in fraudulent and unfair trade practices relating to securities he
shall be liable to a penalty of twenty-five 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 of any
security listed or proposed to be listed in a recognised stock exchange,
any manipulative or deceptive device or contrivance in contravention of the
provisions of the Act or the rules or the regulations made thereunder;
(c) employ any device, scheme or artifice to defraud in connection with
dealing in or issue of securities which are listed or proposed to be listed
on a recognised stock exchange;
(d) engage in any act, practice, course of business which operates or
would operate as fraud or deceit upon any person in connection with any
dealing in or issue of securities which are listed or proposed to be listed
on a recognised stock exchange in contravention of the provisions of the
Act or the rules and the regulations made thereunder:
4. Prohibition of manipulative, fraudulent and unfair trade
practices.—(1) Without prejudice to the provisions of Regulation 3, no
person shall indulge in a fraudulent or an unfair trade practice in
securities.
(2) Dealing in securities shall be deemed to be a fraudulent or an unfair
trade practice if it involves fraud and may include all or any of the
following, namely—
(a) indulging in an act which creates false or misleading appearance of
trading in the securities market;
(b)-(d) * * *
(e) any act or omission amounting to manipulation of the price of a
security;
(f) publishing or causing to publish or reporting or causing to report by
a person dealing in securities any information which is not true or which
he does not believe to be true prior to or in the course of dealing in
securities;
(g)-(j) * * *
(k) an advertisement that is misleading or that contains information in a
distorted manner and which may influence the decision of the investors;
(l)-(q) * * *
(r) planting false or misleading news which may induce sale or purchase
of securities.”
Regulation 12 of the FUTP Regulation also contemplates suspension or
cancellation of registration of intermediaries. For the sake of brevity the
provision (Regulation 12) is not being quoted.
17. The SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 in
Schedule II provides for Code of Conduct for stock brokers in the following
terms :-
“SCHEDULE II
Securities and Exchange Board of India
(Stock Brokers and Sub-brokers)
Regulations, 1992
CODE OF CONDUCT FOR STOCK BROKERS
[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 Code of Conduct for Stock Brokers, inter alia, lays down that the
stock-broker shall maintain high standards of integrity, promptitude and
fairness in the conduct of all investment business and shall act with due
skill, care and diligence in the conduct of all investment business. The
code also enumerates different shades of the duties of a stock-broker
towards the investor, details of which are not being extracted herein
except to say that all such duties pertain to the high standards of
integrity that the stock-broker is required to maintain in the conduct of
his business.
19. Chapter VI of the Conduct Regulation, 1992 deals with liability for
contravention of the provisions of the Act, Rules or the Regulations in the
following terms :-
“CHAPTER VI
PROCEDURE FOR ACTION IN CASE OF DEFAULT
[Liability for contravention of the Act, rules or the regulations -
25. A stock broker or a sub-broker who contravenes any of the provisions
of the Act, rules or regulations framed thereunder shall be liable for any
one or more of the following actions—
(i) Monetary penalty under Chapter VIA of the Act.
(ii) Penalties as specified under 59[Chapter V of the Securities and
Exchange Board of India (Intermediaries) Regulations, 2008] including
suspension or cancellation of certificate of registration as a stock broker
or a sub-broker, (iii) Prosecution under section 24 of the Act.
LIABLE FOR MONETARY PENALTY
26. A stock broker or a sub-broker shall be liable for monetary penalty in
respect of the following violations, namely-
(i) to (x) * * *
(xi) Indulging in fraudulent and unfair trade practices relating to
securities.
(xii) to (xv) * * *
(xvi)Failure to exercise due skill, care and diligence.”
20. Before embarking upon the necessary discussions, we would like to
record our views on a somewhat unclear if not a confused picture that
emanates from parallel provisions contained in the Act and the Regulations
framed thereunder, as referred to above. This is particularly in the
context of the power of imposition of penalty on determination of liability
either for manipulative or fraudulent practices or for violation of the
Code of Conduct Regulation, 1992. The different Regulations including the
Regulations that prescribe the procedural course, namely, SEBI (Procedure
for Holding Enquiry by Enquiry Officer and 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 development of
the economy. The provisions of the SEBI Act and the Regulations will,
therefore, have to be understood and interpreted in the above light.
22. It is a fundamental principle of law that proof of an allegation
levelled against a person may be in the form of direct substantive evidence
or, as in many cases, such proof may have to be inferred by a logical
process of reasoning from the totality of the attending facts and
circumstances surrounding the allegations/charges made and levelled. While
direct evidence is a more certain basis to come to a conclusion, yet, in
the absence thereof the Courts cannot be helpless. It is the judicial duty
to take note of the immediate and proximate facts and circumstances
surrounding the events on which the charges/allegations are founded and to
reach what would appear to the Court to be a reasonable conclusion
therefrom. The test would always be that what inferential process that a
reasonable/prudent man would adopt to arrive at a conclusion.
23. Let us apply the aforesaid test to the facts of the present cases
before us wherein admittedly there in no direct evidence forthcoming. The
first relevant fact that has to be taken note of is that the scrips in
which trading had been done were of illiquid scrips meaning thereby that
such scrips though listed in the Bombay Stock Exchange were not a matter of
everyday buy and sell transactions. While it is correct that trading in
such illiquid scrips is per se not impermissible, yet, voluminous trading
over a period of time in such scrips is a fact that should attract the
attention of a vigilant trader engaged/engaging in such trades. The above
would stand fortified by the note of caution issued by the Bombay Stock
Exchange in the form of a notice/memorandum alerting its members with
regard to the necessity of exercising care and caution in case of high
volume of trading in illiquid scrips, as already noted.
24. Insofar as first case (C.A. No.2818 of 2008 SEBI Vs. Kishore R.
Ajmera) is concerned the proved facts are as follows:
(i) Both the clients are known to each other and were related entities.
(ii) This fact was also known to the sub-broker and the respondent –
broker.
(iii) The clients through the sub-broker had engaged in mutual buy and sell
trades in the scrip in question, volume of which trade was significant,
keeping in mind that the 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 sub-broker 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 said fact by itself i.e. proximity of time between
the buy and sell orders may not be conclusive in an isolated case such an
event in a situation where there is a huge volume of trading can reasonably
point to some kind of a fraudulent/manipulative exercise with prior meeting
of minds. Such meeting of minds so as to attract the liability of the
broker/sub-broker may be between the broker/sub-broker and the client or it
could be between the two brokers/sub-brokers engaged in the buy and sell
transactions. When over a period of time such transactions had been made
between the same set of brokers or a group of brokers a conclusion can be
reasonably reached that there is a concerted effort on the part of the
concerned brokers to indulge in synchronized trades the consequence of
which is large volumes of fictitious trading resulting in the unnatural
rise in hiking the price/value of the scrip(s). It must be specifically
taken note of herein that the trades in question were not “negotiated
trades” executed in accordance with the terms of the Board’s Circulars
issued from time to time. A negotiated trade, it is clarified, invokes
consensual bargaining involving synchronizing of buy and sell orders which
will result in matching thereof but only as per permissible parameters
which are programmed accordingly.
26. It has been vehemently argued before us that on a screen based
trading the identity of the 2nd party be it the client or the broker is not
known to the first party/client or broker. According to us, knowledge of
who the 2nd party/ client or the broker is, is not relevant at all. While
the screen based trading system keeps the identity of the parties anonymous
it will be too naive to rest the final conclusions on said basis which
overlooks a meeting of minds elsewhere. Direct proof of such meeting of
minds elsewhere would rarely be forthcoming. The test, in our considered
view, is one of preponderance of probabilities so far as adjudication of
civil liability arising out of violation of the Act or the provisions of
the Regulations framed thereunder is concerned. Prosecution under Section
24 of the Act for violation of the provisions of any of the Regulations, of
course, has to be on the basis of proof beyond reasonable doubt.
The conclusion has to be gathered from various circumstances like
that volume of the trade effected; the period of persistence in trading 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 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.
27. Insofar as the plea of violation of principles of natural justice, as
raised on behalf of the respondent in C.A.No.282/2014 (Monarch Networth
Capital Ltd.) is concerned, we do not think the same to be justified in any
manner. The relevant extracts of the trade log which have been perused by
us, in view of the clear picture disclosed with regard to the particulars
of the offending transactions, must be held to be sufficient compliance of
the requirement of furnishing adverse materials to the affected party. It
is not the case of the respondents that such trading in the scrips in
question had been a regular feature all along. Insofar as the statement of
Indumati Gowda is concerned, it is the stand of the SEBI that the same was
not relied upon to come to the impugned conclusions and findings. The
statement of Shirish Shah, who admittedly was behind the manipulative
practices in question through the brokers, was definitely not the
foundation of the impugned findings recorded by the Whole Time Member of
SEBI. The statement of Shirish Shah, even if not furnished to the
respondent brokers, would not materially alter the situation inasmuch as
it is the liability of the respondent-brokers, on account of their failure
to correct the huge irregularities that were going on through their
terminals, that was the subject matter of consideration of the Whole Time
Member.
28. The fact that on behalf of the client Indumati Gowda similar
transactions were entered into in respect of other illiquid scrips which
did not disclose any irregularities can hardly be a ground to overlook
what has happened in case of the scrip involved in which the respondent
Monarch Networth Capital 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 sub-broker. 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 of the FUTP Regulations cannot be a basis
for alteration of the punishment of suspension imposed on M/s. Monarch
Networth Capital Limited to one of monetary penalty. In this regard,
provisions of Section 15J of the SEBI Act has to be kept in mind 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.
31. In the light of the above discussions, we dismiss the Civil Appeal
No.2818 of 2008 (SEBI Vs. Kishore R. Ajmera) and affirm the order dated
05.02.2008 passed by the Securities Appellate Tribunal, Mumbai.
Insofar as the remaining appeals are concerned, 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.
…….…………………………...J.
[RANJAN GOGOI]
…………………………….……J.
[PRAFULLA C. PANT]
NEW DELHI;
FEBRUARY 23, 2016.
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