Securities Appellate Tribunal
Jayantilal Khandwala And Sons Pvt. Ltd. vs Sebi on 23 November, 2010
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.63 of 2007
Date of Decision : 23.11.10
Jayantilal Khandwala and Sons Pvt. Ltd.
201, Stock Exchange Tower,
Dalal Street, Fort, Mumbai. ..... Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A,
G Block, Bandra Kurla Complex,
Bandra (East), Mumbai. ......Respondent
Mr. Zal Andhyarujina, Advocate with Mr.Neerav Merchant and Ms. Poonam Gadkari, Advocates for the Appellant.
Dr. Poornima Advani, Advocate with Ms. Pranita Mhatre, Advocate for the Respondent. CORAM : Justice N.K. Sodhi, Presiding Officer Samar Ray, Member P.K. Malhotra, Member Per : Justice N.K. Sodhi, Presiding Officer (Oral) Whether the appellant, a stock broker is guilty of rigging upwards the price of the scrip of Roofit Industries Ltd. (for short the company) and whether it aided and abetted its clients in this regard is the short question that arises for our consideration in this appeal.
2. The appellant was served with a show cause notice dated September 22, 2003 alleging that it had traded in the scrip of the company for two of its clients namely, Habiscus Investment Pvt. Ltd. and Onlooker Investments Pvt. Ltd. (hereinafter referred to as Habiscus and Onlooker respectively) who were related to each other and also related to the promoters/directors of the company. It was further alleged that the appellant as a stock broker had continuously placed buy orders on behalf of Habiscus and Onlooker at prices higher than the previous traded price which resulted in increase in the price of the scrip. Reference in this regard was made to the trades executed by the appellant in three settlements in the months of November and December, 1999. These trades were executed from 7.11.1999 to 12.11.1999, 29.11.1999 to 3.12.1999 and again from 6.12.1999 to 10.12.1999. The appellant was also alleged to have aided and abetted the two clients with whom it is alleged to have acted in concert with the intension of artificially raising the price 2 of the scrip. It is on the basis of these allegations that the appellant is said to have violated the provisions of Regulation 4(a) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 and clauses A(3) and A(4) of the Code of Conduct prescribed for the stock brokers under Regulation 7 read with Schedule II to the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (for short the Stock Broker Regulations). The appellant did not file any reply to this show cause notice. An enquiry was held against it in accordance with the procedure prescribed in the Securities and Exchange Board of India (Procedure for Holding Enquiry by the Enquiry Officer and Imposing Penalty) Regulations, 2002. The enquiry officer examined the material collected during the course of the enquiry and the investigations that were held prior thereto and submitted his detailed report dated September 14, 2006 holding the appellant guilty of the charges levelled against it. He recommended the suspension of the certificate of registration of the appellant as a stock broker for a period of 6 months. The enquiry report was considered by a whole time member of the Securities and Exchange Board of India (referred to hereinafter as the Board) who then served another notice dated November 16, 2006 on the appellant calling upon it to show cause why the enquiry report be not accepted and appropriate action not taken against it for the alleged violations. A copy of the enquiry report was sent to the appellant alongwith this notice. The appellant filed its reply to this notice denying the allegations in toto. The appellant was then given a personal hearing by the whole time member who after considering the material on the record and the submissions made by the appellant including the written submissions, concluded that even though it had indulged in manipulative transactions which resulted in influencing the price of the scrip upwards to the detriment of the investors, the charge regarding violation of Regulation 4(a) could not be established as the clients had not been charged with the same violation. Having regard to the nature of the violations committed by the appellant, the whole time member by his order dated May 23, 2007 suspended the certificate of registration of the appellant for a period of 15 days. It is against this order that the present appeal had been filed.
3. We have heard the learned counsel for the parties and are of the view that the impugned order cannot be sustained. As already noticed, one of the charges against the appellant is that it traded for clients who were related to each other and also related to the promoters/directors of the company. This could be true but this allegation by itself does not 3 establish the charge against the appellant. It cannot establish the fact that the appellant in collusion with its clients had rigged the price of the scrip upwards. In order to establish this part of the charge, one has to look to the trades executed by the appellant on behalf of the two clients. The enquiry officer in his report had prepared a chart showing the client-wise details of the trades executed by the appellant in the scrip of the company. That chart reads as under:
Sett Client Name Buy Sell Gross Net No. 38 Onlooker Investment Pvt. Ltd. 8,200 8,200 16,400 - 34 Motwani Enterprises 3,500 - 3,500 3,500 34 Habiscus Investment Pvt. Ltd. 14,200 14,200 14,200 37 Habiscus Inv. Pvt. Ltd. 15,600 15,600 31,200 - 38 Habiscus Inv. Pvt. Ltd. 15,600 15,600 31,200 - 34 Milind Tamhane 1,100 1,100 1,100 34 Aparna Tamhane 100 100 100
It is clear that the appellant traded on behalf of Onlooker and Habiscus in settlements nos. 34, 37 and 38. The enquiry officer then analysed the trade and order logs and examined the trades executed by the appellant in these 3 settlements. The trades in settlement no.34 executed during the period from 7.11.1999 to 12.11.1999 show the price movement of the scrip in the following manner as noticed by the enquiry officer:-
Open High Low Close Trades Volume Turnover Date (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) 07/11/1999 160.00 167.65 159.80 167.65 21 3000 496275 09/11/1999 175.00 181.05 162.05 181.00 59 9760 1713024 11/11/1999 195.45 195.45 191.10 194.10 123 20660 4014485 12/11/1999 187.00 196.00 182.55 194.80 93 16500 3126732
From an analysis of the trade and order logs it is clear that on 9.11.1999 the scrip had hit the upper circuit limit of 8 per cent at 13:53:08 hours when the appellant had put in a buy order for 100 shares at the rate of Rs.181.05. This order had been placed on behalf of Habiscus and it matched with the pending sell order from another broker namely, SSJ Finance and Securities. The pending sell order was put into the system at 13:31:47 hours i.e. more than 20 minutes before the buy order was placed by the appellant. Since there was an order pending, both the orders matched and the trade got executed. On 09.11.1999 after the appellant's trade had been executed, trading in the scrip continued till the end of the trading session i.e. upto 3.30 p.m. and trades close to the circuit hitting price of Rs.181.05 had been executed. There is nothing on the record to show how many such trades were executed. The enquiry report does establish the fact that trades at the circuit hitting price were in fact 4 executed during the one and half hour period after the appellant's trade was completed. This fact clearly establishes the point that apart from the appellant, there were several others who were trading in the scrip almost at the same price. Again, on 11.11.1999 the appellant placed a buy order for 1000 shares at the rate of Rs.195 per share on behalf of Habiscus. This order was placed in the system at 13:35:42 hours. The trade was executed one second thereafter for 800 shares only with a pending order. Since how long the sell order was pending in the system is not clear from the record. The fact is that there was an order pending earlier in point of time which matched with the subsequent buy order put in by the appellant. The price of Rs.195 is said to be close to the upper circuit limit and it is alleged that the appellant raised the price by executing the trade at this rate. What is interesting to note is that the buy order put in by the appellant for 1000 shares was executed only for 800 shares. Even at the higher price, 1000 shares could not be procured which only goes to show that the demand for the scrip then had outstripped the supply and this could well be the reason for the price rise. Another feature of the trading on 11.11.1999 is that at 10:37:00 hours the price of the scrip was ranging between Rs.195.45 and Rs.194 and if the appellant executed the trade at 13:35:42 hours at the rate of Rs.195, can it be said that he was raising the price of the scrip upwards? The obvious answer is in the negative. Similarly on 12.11.1999, the appellant had placed a purchase order for 600 shares and could procure only
500. It is not necessary for us to examine the other trades of the appellant which have a similar pattern. We are satisfied that the demand for the scrip was more than the supply. This being the position, the price of the scrip had to go up. It is by now well understood that the price discovery mechanism of a stock exchange works on the principle of demand and supply which means that the price of a scrip as determined by the exchange mechanism is what a willing buyer would pay to a willing seller. From the aforesaid trading pattern of the appellant, we are unable to agree with the whole time member that the appellant was rigging the price of the scrip upwards.
4. There is yet another reason why the appellant cannot be held guilty of rigging the price of the scrip upwards. What is alleged is that the appellant raised the price by placing buy orders at a price higher than the last traded price. The stand of the appellant is that it had received instructions from the clients to put in limit orders which means to purchase the shares at a price up to a certain limit and there is nothing unusual about such orders. The whole time member has not dealt with this plea of the appellant. Be that as it may, there 5 could be variety of reasons why a trader through his broker would put in buy orders at a price higher than the last traded price without being charged with price rigging. For instance, a client may be desperate to purchase the shares to meet his market obligations as a result whereof he puts in buy orders at the highest possible price to sweep all the pending orders and lure others to sell their shares. It could also be that a trader may feel that the scrip of a particular company is being traded in the market at a price lower than its potential value and this does happen in the market quite often. He may take an informed decision and purchase as many shares as he could as a good investment. There could be several other reasons for putting in orders at a higher price than the last traded one. The Board should have examined the clients to find out the reason for giving instructions to the appellant for placing limit orders. There is nothing on the record to show that their statements were ever recorded. A some what similar issue came up for the consideration of this Tribunal in Jagruti Securities Limited vs. Securities and Exchange Board of India, Appeal no.102 of 2006 decided on October 27, 2008 and this is what we observed:-
"By putting in buy orders into the system and ensuring that its order was the first one therein at a higher rate than the last traded price, it could well be inferred that the appellant was keen that the purchase order goes through the system and the shares are purchased. During the course of the investigations, the appellant was asked as to why this was being done and his reply was that he was keen to complete the transactions as early as possible and, therefore, he was putting in the order at a little higher rate to attract the sellers. When this explanation is considered in the light of the fact that Ameet Parikh had placed an open ended order with the appellant for the purchase of 70,000 odd shares against the credit that he had with the appellant, there is nothing unnatural about the same. This pattern of trading could be an indication of his desire to purchase the shares for whatever reason. A similar view was taken by this Tribunal in Ketan Parikh v. Securities and Exchange Board of India, Appeal No. 2 of 2004 decided on 14.7.2006. The charge levelled against the appellant therein was that he had indulged in manipulating upwards the price of the scrip of Lupin Laboratories Ltd. and the same was established on the basis of charts showing that buy orders had been placed at prices higher than the last traded price. While reversing the order of the Board, this Tribunal observed that merely because some buy orders had been placed at prices higher than the last traded price in the scrip would not lead to the inference that the price was being manipulated upwards. It could indicate the desire of the appellant to purchase the shares and it is with that object in view that he may have put in buy orders at the higher rate. The Board did not challenge the findings recorded by the Tribunal. Similar is the position in the case before us."
5. We have noticed the charge levelled against the appellant. It is alleged to have rigged the price of the scrip by placing buy orders higher than the last traded price in the scrip. Such a charge could be established if we had material on the record to show that sell orders were pending in the system at rates lower than the rates at which the appellant 6 purchased the shares. If that were so, one could infer that the appellant was trying to set a higher benchmark because every trade establishes the price. In the case before us we have no data showing what were the pending sell orders at the time when the buy orders were placed. In the absence of such a data, the charge as laid in the show cause notice cannot be said to have been established. A similar view was taken by this Tribunal in KNC Shares & Securities Pvt. Ltd. vs. Securities and Exchange Board of India, Appeal no.39 of 2009 decided on September 7, 2010.
6. The charge of violating the code of conduct was laid in the show cause notice because the appellant was alleged to have rigged the price of the scrip. The code of conduct prescribed for the stock brokers provides that no stock broker shall indulge in manipulation. Since the charge of rigging the price of the scrip has failed, the charge against the appellant for violating the code of conduct must also fail.
For the reasons recorded above, we cannot uphold the findings recorded by the whole time member and answer the question posed in the opening part of the order in the negative. In the result, the appeal is allowed and the impugned order set aside leaving the parties to bear their own costs.
Sd/-
Justice N.K.Sodhi Presiding Officer Sd/-
Samar Ray Member Sd/-
P.K. Malhotra Member 23.11.2010 Prepared and compared by RHN 7 Another feature of the case that needs to be noticed is that there is not allegation in the instant case that the appellant or its clients were in collusion with the counter party broker or with the counter party for raising the price of the scrip artificially. It is also not the case of the Board that the appellant as a broker had executed any synchronized trades with a view to manipulate the price. In the absence of any such allegations we do not think that the charge of rigging the price upwards could be established or that the appellant could be held guilty of violating the code of conduct.