Securities Appellate Tribunal
Sharedeal Financial Consultants Pvt. ... vs Chairman, Securities And Exchange ... on 23 May, 2003
Equivalent citations: (2003)4COMPLJ148(SAT), [2003]44SCL613(SAT)
ORDER
C. Achuthan, Presiding Officer
1. The present appeal is directed against the Respondent's order dated 16.9.2002. By the said order the Respondent suspended the certificate of registration granted to the Appellant, for a period of nine months from 1.10.2002 holding the Appellant guilty of violating clause A(2) of Schedule II of the Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Regulations, 1992. The Appellant is a member of the Bombay Stock Exchange (BSE).
2. The background in which the Respondent issued the impugned order, has been stated in the impugned order as follows:
3. Market witnessed abnormal price and volume movement in the shares of Amara Raja Batteries Ltd (ARBL) traded on Bombay Stock Exchange (BSE)and National Stock Exchange (NSE), in February - March, 2001. The Respondent received complaints alleging market manipulation/ irregularities in the trading of ARBL's shares. In that context the Respondent ordered investigation to ascertain the role played by various persons/intermediaries, and violations, if any, of the regulatory provisions by them. The investigation is stated to have revealed that Shri Harinarayan Bajaj and his son Shri Rahul Bajaj were the dominant traders in the ARBL's shares during the period August 2000 to March 2001, that some of the members of BSE and NSE had aided and abetted Shri Harinarayan Bajaj in creating a false market in ARBL's scrips and also that they had failed to exercise due care and skill in their dealings. The Appellant was one of the members whose involvement in the matter was subjected to investigation. In the light of the information collected during the course of investigation, the Respondent decided to conduct a detailed enquiry into the role and conduct of the Appellant in trading in the scrip. Accordingly an enquiry officer was appointed on 18.6.2001 to enquire into the affairs of the Appellant in its dealings in the scrip of ARBL and the possible violations of the rules, bye laws and regulations of BSE, provisions of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (the FUTP Regulations) and the Securities and Exchange Board of India (Stock-brokers and Sub-brokers) Regulations, 1992 (the Stock Broker Regulations). The enquiry officer on concluding the enquiry came to the conclusion that the Appellant had failed to exercise due care and skill in its dealings with Shri Bajaj as required by clause A(2) of the code of conduct prescribed for the stock-brokers in the Stock Broker Regulations. He recommended 9 months' suspension of the certificate of registration granted to the Appellant. The Respondent communicated the findings of the enquiry officer to the Appellant and asked to show cause as to why the penalty as recommended by the enquiry officer should not be imposed against it. The Appellant responded to the same by filing written explanation and making oral submissions before the Respondent.(the Chairman) The Chairman adjudicated the show cause notice. Vide his order dated 16.9.2002 the certificate of registration granted to the Appellant was suspended for a period of 9 months from 1.10. 2002.
4. Claiming to be aggrieved by the said order, the Appellant has preferred the present appeal.
5. Shri Shyam Mehta, learned Counsel appearing for the Appellant, refuted the Respondent's contention that the present appeal is not maintainable. He submitted that in terms of section 15T of the Securities and Exchange Board of India Act, 1992 (the Act) any person aggrieved by an order of the Respondent is entitled to prefer an appeal to the Tribunal, that since the Appellant is aggrieved by the Respondent's order, it has filed the present appeal, and the Tribunal is empowered to decide as to whether the reliefs sought in the appeal are to be granted or not, that by seeking certain reliefs the appeal itself does not become non maintainable.
6. Shri Shyam Mehta, briefly stated the facts leading to filing of the present appeal and the profile of the Appellant. It was submitted that the Appellant is in stock broking business since 1992, that its record is unblemished, that it had never defaulted at any time either to stock exchanges or to its clients, that its financial status and standing is evident from the fact that the type of its institutional clients viz. Unit Trust of India, Mutual Funds etc., that its turnover in the year 2000-2001 was Rs. 1833 crores.
7. Learned Counsel submitted that the finding against the Appellant arrived at by the Respondent as per the impugned order is that it had failed to exercise due care and skill in its dealings with its client, Shri Harinarayan Bajaj, and thereby violated clause A(2) of the Code of Conduct as prescribed under regulation 7 of the Stock Broker Regulations. He submitted that according to the Respondent the Appellant had given high exposure to its client, allowed the client to take position beyond the client's financial capability, traded beyond its own financial capabilities, and further that it had purchased huge quantity of shares despite having a debit balance on account of its client, and based on the said conclusion the Respondent has justified imposition of penalty of suspension of the certificate of registration of the Appellant for a period of nine months. Learned Counsel disputed the Respondent's findings and the conclusions. According to him the Respondent has come to wrong conclusions based on wrong information and imposed the penalty wrongly. Shri Mehta submitted that the Appellant exercised due skill and care throughout, that lack of due care and skill is levelled against the Appellant in the context of extra ordinary upheaval in the market, that the market behaviour was beyond the control of the Appellant.
8. Learned Counsel referred to that part of the enquiry report dealing with the charges levelled against the Appellant and submitted that the charges are broadly of 2 categories i.e. (i) failure to exercise due care and skill as per the Code of Conduct under Stock Broker Regulations and (ii) indulging in unfair trade practices in violation of regulation 4 of the FUTP Regulations.
9. He referred to the following charges framed by the enquiry officer:
"I (a) Sharedeal by virtue of its trading in the scrip of ARBL on behalf of Shri Harinarayan Bajaj has failed to exercise due skill and care in its dealings;
(b) Sharedeal has traded in the scrip of ARBL beyond the financial capability of Shri Harinayran Bajaj;
(c) Sharedeal has traded in the scrip of ARBL beyond its own financial capability;
(d) Sharedeal, despite having debit balance on account of Shri Harinarayan Bajaj, again purchased 1,50,000 shares on March 12, 2001 worth aproximately 4.27 crores;
and, therefore, violated the Code of Conduct under Regulation 7, Schedule II of Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Regulations, 1992 and II Sharedeal has aided and abetted Shri Harinarayan Bajaj and his family members in creating a false and misleading market in the scrip of ARBL and therefore, guilty of violating the provisions of regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995."
10. He submitted that the Respondent has exonerated the Appellant of the serious charge of market manipulation but curiously the penalty has been imposed for the alleged failure to exercise due care and skill.
11. Learned Counsel submitted that the charge that the Appellant failed to exercise due care and skill as per Clause A(2) of the Code of Conduct is on four counts i.e. (a) by virtue of trading in the scrip of ARBL for Shri Bajaj (b) trading in the scrip of ARBL beyond the financial capacity of Shri Bajaj (c) trading in the scrip of ARBL beyond the Appellant's own fainancial capacity and (d) purchase of 1,50,000 shares of ARBL for Shri Bajaj on 12.3.2001, despite Bajaj having a debit balance with the Appellant on that day. He submitted that the charge that the Appellant by virtue of trading in the scrip of ARBL on behalf of Shri Harinarayn Bajaj failed to exercise due skill and care in its dealings is a vague and general charge, that in any case the enquiry officer has also reported that "there is no proof that Sharedeal was aware of Mr. Bajaj's dealings with others", that there was no ban on trading for Shri Bajaj. Shri Mehta stated that the Appellant started trading for Shri Bajaj from Sett. A 37 to A 51 and, nothing adverse had come to the notice of the Appellant when the Appellant accepted Shri Bajaj as its client to view that he was not a fit and proper client to deal with, and for the reason of trading for Shri Bajaj the Appellant can not be said to have failed to exercise due skill and care. He further submitted that the charges at (b) (c) and (d) remain unsubstantiated. He referred to the "Trading delivery, carry forward position of ARBL", presented in the order in the tabular form and submitted that the data furnished therein do not indicate any abnormality in the trading transactions effected by the Appellant . According to the learned Counsel ARBL share being in Group A, the trade therein was allowed to be carried forward with requisite margin back up, that the Appellant carried forward the trade after obtaining sufficient margin from Shri Bajaj, that it is not the Respondent's case that the trade was carried forward without collecting the requisite margin deposit. In this context he referred to the observation made by the enquiry officer in his report that:
"Shri Harinarayan Bajaj, the client of the member, had paid an initial margin of Rs. 1.5 lacs and thereafter made bill to bill payments and margin payments till Settlement No. 49/2000-01. In Settlement No. 50, Harinarayan Bajaj had a payment obligiation of Rs. 14309651/- against which he had made an advance payment of only Rs. 55,00,000 to the member. Despsite having debit balance on account of Harinarayan Bajaj the member again purchased 1,50,000 shares on March 12, 2001 worth approx. Rs. 4.27 crores. It may be noted that no other member other than Sharedeal Financial Consultants P. Ltd., had purchased in the scrip on behalf of Harinarayan Bajaj or persons acting in concert with him in Sett. No. 51. At the end of settlement number 51/2000-01 Harinarayan Bajaj has a total outstanding of Rs. 9,15,57,597/- with the member."
12. Learned Counsel submitted that the Appellant started trading for Shri Harinarayan Bajaj from 5.12.2000, that he was introduced to the Appellant by one of its clients and all the pre registration requirements were complied with, that trade was done as per the instructions of Shri Bajaj, that by and large Shri Bajaj was prompt in meeting with the necessary margins and regular pay-in, and therefore the Appellant had no reason to doubt Shri Bajaj's bonafides.
13. Learned Counsel referred to the allegation that the Appellant despite having debit balance in the account of Shri Harinarayan Bajaj, purchased 1,50,000 shres on March 12, 2001 worth approx. Rs. 4.27 crores and submitted that the allegation is baseless that the Respondent has not considered the factual position in this regard as brought to its notice by the Appellant. He submitted that the BSE survillance knew that Shri Bajaj was operating through several members of BSE, about Shri Bajaj's over exposure in the single scrip, that had BSE forewarned the Appellant in time that Shri Bajaj was also dealing with other brokers in the same scrip at the same time, the Appellant would have stopped dealing with him. He submitted that the Appellant was unaware of the operations of Shri Bajaj through other brokers. According to the learned Counsel the Appellant had taken sufficient margin from Shri Bajaj from the beginning as per BSE/SEBI norms. In this context he referred to the copy of the ledger account filed in the proceedings and submitted that the said account would show that at no point of time Shri Bajaj's balance was in debit, except at Valan 51 and 52 and that too because of the ciricumstances beyond control i.e. (a) sudden imposition of additional volatility margin after 12.3.2001 (b) sudden increase in carry over margins from Rs. 72 to Rs. 144, that after 12.3.2001 the huge debit was primarily due to the fact that the Appellant did not get any chance of squaring up because of six continuous down circuits. He submitted that buying 1,50,000 shares of ARBL on 12.3.2001 was in normal course of business. Shri Bajaj failed to pay further margins or squre up the transactions in valan No.51 as he used to do earlier and due to the fall of ARBL price from Rs. 167 to Rs. 67.50 in 6 consecutive down circuits of 16%. Learned Counsel submitted that one has to take into consideration the actual position which was prevailing on 12.3.2001, that with hindsight many things can be said. He submitted that for the transaction effected on 12.3.2001 payment was due on 21.3.2001, that on 12.3.2001 everything was normal, and one could not imagine that the scrip price was going to crash, that the Appellant purchased the shares going by Shri Bajaj's past record and for that the Appellant can not be blamed. Learned Counsel submitted that since December 2000, Shri Bajaj was the Appellant's client, that there was nothing to even suggest that he was not a desirable client to deal with, and as Shri Bajaj's broker it was its duty to buy shares for him, and in that context the Appellant's action can not be considered as an imprudent action. Learned Counsel referred to the gist of the factual position submitted by the Appellant and the observation made by the enquiry officer in his report that:
"Sharedeal, in its reply dated 23.08.2001, submitted that we were not aware that Mr. Harinarayan G. Bajaj was also trading through other members of BSE/NSE. Even the same was not disclosed by him in his client registration form. Mr. Harinarayan G. Bajaj had met all his commitments for and upto vallan no. 49 in the normal course of business. There was no default on any pay-in / margins etc. Mr. Bajaj acted as a trader in all 'A' group scrips only and even took deliveries of several scrips from time to time. We also enclose herewith Badla statistics of BSE where the net carry forward information in ARBL in the market as a whole (ANNEXURE - III). As can be seen from the carry forward position from vallan nos. 37 to 49, the average carry forward position by us was about 1 lac shares in the scrip of ARBL. The net carry forward position of Teji/ Mandi/ Share/ Vyaj Badla on BSE for the same period was on an average 6.5 -7.5 lac shares, of which our carry forward is very negligible.
As regards the allegation that against the debit of Rs. 1,43,09,651/- for vallan no. 50 and with margins of Rs. 55 Lacs only we had purchased of 1,50,000 shares on 12-3-2001, we humbly submit as under:-
"We executed the transactions of Mr. Bajaj in the regular course of business as he was doing with us, whereby he used to square up within the same settlement regularly and without any problem from Vallan No. 37 to Vallan No. 50.
We did not encounter any difficulty in obtaining margin payment or pay-in from vallan no. 37 to vallan no. 49 and not even a single cheque had bounced earlier for us to suspect any malafide intention or anticipate any big problem of his not meeting any of his commitment for the dealings.
In vallan no. 50 our outstanding position was 220556 shares. The provisional carry forward margin on the same was @Rs.76/- per share (as per provisional Hawala). After taking into account, the said provisional margin and credit for 20000 shares delivered in vallan no. 50 by us on his behalf we expected a marginal debt of Rs. 19.50 lacs (approx.) out of which Rs. 10 lacs was already lying in his account as on 9-3-2001 (as per ledger copy of Mr. Bajaj enclosed - ANNEXURE V). As the next day was Holi (10th March, 2001) the market remained closed. On Monday, 12th March, 2001 our client came alongwith a cheque of Rs. 45.00 lacs towards Daily margin Payments and promised to pay further sum of Rs. 50 lacs on the same day. Based on this our dealer had executed his order for purchase of 150000 shares in the regular course of business in the opening session of the market in good faith with the clear understanding with the client that this would be squared off during the settlement as was the practice followed in the earlier settlement and without realising in any way what was to ensue later in terms of continuous down circuits hitting immediately thereafter for the next 6 consecutive days. Also simultaneously and unexpectedly Mr. Bajaj did not fulfill his promise of making payment of Rs. 50 Lacs on the same day due to his dealings with many other brokers, which we came to know subsequently.
Our client defaulted and in turn we also failed to deposit the additional margin levied nor we could square off the transactions despite our efforts. Margin liability on us kept on mounting to unmanageable levels forcing our default due to which our Bolt terminals were deactivated by the BSE authority.
As far as your charge that we were the only broker to buy in Settl. No. 51 (i.e. 12th March, 2001 to 16th March, 2001) is concerned we would like to point out that due to down circuit and huge number of sellers displayed on Bolt Terminals thereafter on BSE other brokers kept away due to psychology of down circuit. However, we understand that on NSE other brokers had bought shares throughout the day on March 12th, 2001."
14. Learned Counsel submitted that the debit balance Rs. 1.43 crores is a revised figure, that this was prepared on 15.3.2001 after revision, that the amount was revised due to revised margin calculation, from Rs. 76 to Rs. 132 and if the margin rate had remained unchanged the figure would have been just Rs. 19.58 lacs. He submitted that when the Appellant executed the trade, the rate was Rs. 76/-and it was after execution of the trade, it came to know of the revision. He submitted that on 12.3.2001, the Appellant entered the trade between 9.55 A.M. and 9.58 A.M, that it was in the pre opening session, that on the morning of 12.3.2001 there was adjusted unutilised capital of Rs. 26,84,583 in the account of the Appellant with BSE available for trading, that the Appellant learnt about the BSE Notice dated 9.3.2001 revising the margin from Rs. 76/- per share to Rs. 132/- per share only on 12.3.2001 because of intervening holidays.
15. According to the Appellant it had always collected/maintained the required margin from Shri Bajaj that even the carried forward margin to be maintained by the broker with the Stock Exchange was properly adhered to and there was always credit balance in the account of Shri Bajaj, that as on 9th March, 2001, the margin required to be maintained by the Appellant with the BSE for carry forward of ARBL scrip was Rs. 76/- per share and on this basis the Appellant was required to provide for a margin of Approx. Rs. 1,67,00,000/- (on 2,20,556 Shares) towards the pay-in on 14.3.2001 against which the Appellant had a margin/credit from Mr.H.Bajaj of Rs. 1.53 Crores
16. According to the Appellant, it was a victim of unusual fall in the price of the ARBL scrip (i.e. continuous down circuits of 16% everyday for 7 consecutive trading days, that when the price fell from Rs. 290 to Rs. 70 and that too without volumes) the Appellant found itself helpless in exiting from the market and subsequently meeting its financial commitments on marked to market margins, that this sort of situation could not have been imagined by any reasonable person especially in view of the ARBL scrip being traded under 'A' Group on BSE.
17. Shri Mehta referred to the following observation by the enquiry officer:
"It is to be noted that Shri. Bajaj had a huge debit balance of Rs. 9.15 crores at the end of Settlement No. A 51 with Sharedeal. Hence, Sharedeal has suffered a huge loss in its dealing with Shri Bajaj in the scrip of ARBL. Sharedeal has also defaulted in its pay-in obligation to the exchange and subsequently declared defaulter by the exchange in August 2001.
As revealed in the hearing held on 26.12.2001, during the period from August 2000 to March, 2001, the entire volume of trades executed by Sharedeal was for Mr. Harinarayan Bajaj. In addition (approx. 5% to 10% of the total volume) Sharedeal also executed trades for many other clients and sub-brokers in the scrip of ARBL. This shows that Sharedeal had given a very high exposure to Shri Harinarayan Bajaj by executing series of trades with buy positions ranging from 29,270 shares to 3,97,903 shares. It should be noted that there are no quantitative restrictions laid down with regard to execution of each trade and the same is left to the prudential risk management norms of the Stock Broker within the framework of law. Such a huge exposure to Shri Bajaj is certainly not indicative of any prudential risk management norms adopted by Sharedeal. It is significant to note that Sharedeal had no dealings with Shri Bajaj in the past. It is observed that at the end of Settlement A 49, it had an outstanding open position of 92,653 shares in the name of the client. Yet Sharedeal had again purchased a huge quantity of 3,00,000 shares at the start of the Settlement No. A 50 that too when the price of the scrip was ruling at its 52 week's high. In the oral hearing, Sharedeal had submitted that Shri Hari Narayan Bajaj had dealt with it in many other scrips. It has also stated that an exposure limit of 1,00,000 shares in ARBL for net carry forward at the end of the Vallan was given and only in Settlement No. 50 and 51, this limit was exceeded by Shri Hari Narayan Bajaj. However, no scientific explanation was provided as to how one lac shares exposure cap was fixed without linking it to the price of the scrip. Therefore, the submissions of Sharedeal are not convincing.
Sharedeal has allowed the client to take positions, which is beyond the client's financial capability. During the oral hearing, Sharedeal submitted that before executing trades for Shri Bajaj, it has not only taken initial deposit of Rs. 1.5 lakhs from him in December 2000 but also made enquiries about his networth. It was told that Shri Bajaj has huge properties in Marine Drive and Fort area office, worth Rs. 6 to Rs. 7 crores and therefore it was convinced that Shri Bajaj is a genuine trader. Sharedeal further submitted that it was never aware that Shri Bajaj was dealing with other brokers. Based on his networth as explained above as well as his regular payments of margins and pay-ins, it could never doubt the trades executed for Bajaj, were beyond his financial position. However, Sharedeal had not shown any evidence to establish its claim that it was satisfied of Shri Bajaj's networth. In view of the fact that Shri Bajaj had defaulted a huge sum of Rs. 9.15 crores to Sharedeal, its submissions are not convincing and hence can be concluded that Sharedeal had allowed Shri Bajaj to expose trading in securities beyond his financial capabilities.
With regard to the allegation that Sharedeal has traded in the scrip of ARBL beyond its own financial capability, it was submitted by it during the oral hearing that "the net worth of Sharedeal was in the region of Rs. 2 crores excluding the value of card which at that point of time was valued approx. Rs. 2.5 crores. Besides, we get exposure limits based on Base Minimum Capital which was in excess of Rs. 1 crores, which give trading limit of Rs. 33 crores Intra day and 20 times for the settlement i.e. 20 crores. As already explained, we were always trading for clients within our financial capability." The submissions are not convincing as Sharedeal had to lose Rs. 9.15 crores on one client alone while it is dealing with several other clients/sub-brokers. Ultimately, Sharedeal had defaulted in its pay-in obligations to the exchange. This, itself, amply demonstrates that Sharedeal has traded in the scrip beyond its financial capabilities.
Sharedeal has also executed a buy order of 1,50,000 shares for Shri Hari Narayan Bajaj on March 12, 2001 even though the client had a huge debit balance at the end of Settlement A 50 of BSE."
18. Learned Counsel referred to the Respondent's circular dated 18.11.1993 providing guidelines on precautions to be exercised by member brokers of stock exchanges while dealing with shares on behalf of other clients and submitted that the Appellant has complied with all the said guidelines and no failure in this regard has been alleged against the Appellant.
19. Shri Mehta referred to this Tribunal's decision in LKP Securities Ltd. V SEBI (2003) 41 SCL 1(SAT) and submitted that the charges levelled by the Respondent against LKP and the charges levelled against the Appellant are substantially the same, that the only additional point in the Appellant's case is the purchase of 1,50,000 shares on 12.3.2001. He submitted that though the circumstances under which the said trade was executed was explained to the Respondent, it has not bothered to consider the same. He submitted that taking into consideration the comparable factual position in both the cases, the view taken by the Tribunal in LKP be followed in the present case and the appeal be allowed.
20. He also referred to the decision of the Tribunal in TJ Stock Broking Services P. Ltd. V SEBI (2002) 39 SCL 899 (SAT) and submitted that the charges, but for the violation of SEBI circular dated 7.3.2001 banning naked short sales by TJSBSL, are identical and that the Tribunal had viewed in that case also that except for violation of SEBI direction on short selling, the TJSBSL had not violated any rules. Learned Counsel referred to the following portion from the said order in support of his case:
"On a perusal of the finding stated above it could be seen that the observation in para 2 is relatable to para 1 wherein the Appellant has been charged for "having given excessive speculative exposure to Bajajs" which lead to serious consequences and repercussions in the process of discovery of fair market price of the scrip. In this context it may be noted that the total volume of the trade in ARBL's shares transacted in the month of February and first week of March 2001 was around 8-15 lakhs shares per day. It is also to be noted that the Appellant had submitted before the Enquiry Officer that on any given day, the aggregate outstanding position of Bajaj on both NSE and BSE taken together was not more than 30,000 shares of ARBL, that this outstanding position was only during the Settlement NO. 48-51 on BSE and on NSE for Settlement Nos. 7-10 and no further, that a transaction of 30,000 shares can not be regarded as to have created any impact on the market considering the total volume of turnover in that scrip, much less creating a false and misleading market as alleged. In this context the observation made by the enquiry officer in his report, which the Respondent has accepted, is worth noting. According to the enquiry officer the Appellant had done only few transactions for Bajaj, that they were primarily squared of transactions except one transaction where there was a short sale, that there was no indication of price manipulation at the time the Appellant executed the trade for Bajaj, that the Appellant or its directors did not trade in the scrip of ARBL. He had further stated that "from the material available it is not possible to draw any inference that TJSBSPL was aware of Mr. Bajaj dealing with other brokers except Mukesh Babu Securities Ltd., nor had the information that Mr. Bajaj is indulging in creating a false market in the scrip of ARBL. What TJSBSPL did was normal broking transaction as a stock broker." The clean chit of the conduct of the Appellant has to be kept in mind while considering the charges levelled against them by the Respondent. It is not the Respondent's case that the Appellant had acted in concert with others dealing in the ARBL's scrip.
The Respondent's argument that the Appellant had not verified the financial position of Bajaj, that it should have asked for the details of the annual income and market value of port folio etc. are not that serious to charge them for failure to exercise due skill and care, in the context that Bajaj was introduced as a client by one of the business associates of the Appellant. The argument that the Bajaj's financial capability was unknown to the Appellant remains unsupported that on the contrary, the Appellant had submitted that they had collected margin of Rs, 10 lacs and also Bajaj's account was credited by a further amount of about Rs. 10 lacs during 3 settlements of BSE/NSE which were retained by it as further margin. The Appellant's statement that it was holding 22% margin as against the normal requirement of retaining 10% margin remains undisputed.
The enquiry officer had observed that "during the period from Aug.-2000 to March 2001, the entire volume of trades executed by TJSBSPL was for Shri Harinarayan Bajal and about 2000 shares for other clients. This shows that TJSBSPL had given high exposure to Shri Harinarayan Bajaj by executing a buy order of 30,000 shares in each of the settlement." But in the same breath the enquiry officer has stated that "it should be noted that there are no quantitative restrictions laid down with regard to execution of each trade and the same is left to the prudential risk management norms of the stock broker within the frame work of law.", The Respondent has not explained that what prudential risk management norm, the Appellant had failed to follow or that what was that they did which was not within the framework of law.
In my view in the given set of facts there is nothing to hold that the Appellant had given "excessive speculative exposure" to the Bajaj or that while dealing with Bajajs the Appellant had failed to exercise due skill and exercise."
21. Shri Mehta submitted that what is required as a risk management measure is the back up funds to meet the entire obligiation, that this requirement is decided on certain factors by the concerned broker, that some times a value judgement is taken based on several factors and for any reason subsequently it was found that the said judgement was not the proper judgement, that does not mean that it was taken without care. He submitted that there was no reason to believe that Shri Bajaj would default, that on the contrary his trading pattern was quite normal leaving no one to doubt his bonafides till he defaulted. Shri Mehta stated that even on 12.3.2001 Shri Bajaj gave Rs. 45 lakhs as margin money, that the Appellant could not say to Shri Bajaj that it won't trade for him, and had the Appellant refused to trade for him, it would have been hauled up for violating Clause B(1) of the Code of Conduct.
22. Shri Mehta submitted that the Appellant had sought from the Respondent the relevant materials/details pertaining to the enquiry so as to enable it to counter the charges, but the Respondent denied the same despite the specific direction from the Hon' ble High Court vide its order dated 26th July, 2001 in W.P. 1759/2001 filed by the Appellant for the purpose. He further submitted that though the Appellant had pointed out the factual inaccuracies in the information relied on by the Respondent and had requested to reinvestigate the matter so as to reach at the truth, the Respondent has not bothered to admit the mistakes and reinvestigate the whole issue. Shri Mehta submitted that most of the submissions made by the Appellant countering the charges have not been dealt with in the order, that the Respondent is expected to consider the version of the enquiry officer, and the Appellant and record the findings explaining the reason, that since the Respondent has failed to do so, the order is not a speaking order and as such deserves to be set aside.
23. Shri Kumar Desai, learned Counsel appearing for the Respondent submitted that the present appeal is not maintainable, as most of the reliefs sought therein are not within the purview of the Tribunal, that the Tribunal's appellate power is confined to decide appeal with reference to the order passed by the Respondent or the adjudicating officer. In this context he referred to the prayer in para 6 of the appeal that:
"(1) Setting aside order dated 16.9.2002 passed by the SEBI Chairman i.e. the Respondent (2) In the interest of dispensation of justice and transparency in public interst direct SEBI to supply complete investigation report to the Appellant as requested in writing and during hearing by the Appellant.
(3) Directing SEBI to re-examine the case of ARBL denovo in the light of the submissions made by the Appellant particularly with reference to lapses on the part of BSE/SEBI investigation and give an opportunity to the Appellant to make fresh submissions with regard to this case.
(4) Directing SEBI to investigate the entire transactions including source of funds and shares of buyers/sellers/arbitrageurs in ARBL scrip starting from the day the scrip has been moved to A group in September 1999 by BSE and upto 31.3.2001.
(5) Total investigation by an independent agency appointed by SEBI/Securities Appellate Tribunal"
24. Learned Counsel submitted that except the prayer at serial number (1), this Tribunal can not decide the rest of the prayers, as these are outside the Tribunal's jurisdiction.
25. Shri Desai referring to the Appellant's contention that the Respondent did not provide the relevant reports and material to the Appellant, despite the order of the Hon'ble Bombay High Court, submitted that the Respondent has clearly explained the position in its order and no further explanation is required to demolish the Appellant's said contention. He submitted that the Hon'ble High Court vide its aforesaid order had observed that "enquiry before SEBI will proceed independently of the pendency of the present petition". As regards the copies of the investigation report are concerned the Hon'ble High Court had observed that "it will be for SEBI to decide and then make available those reports to the extent they are concerning to the present petitioners", that the broker member vide letter dated August 23, 2001 had requested for following documents when the enquiry was pending:
a. Report of BSE submitted to SEBI after investigating into the transactions into the shares of ARBL in January 2001.
b. BSE Report in the transaction in the shares of ARBL and submitted in the month of May/June 2001.
c. NSE Report submitted to SEBI after investigating into the transactions into the shares of ARBL in May/June 2001.
d. SEBI's Report in the transaction in the shares of ARBL.
e. SEBI's directive to NSE/BSE on annulment and pay out of the transactions in the shares of ARBL.
f. SEBI's report in the matter of finding out the genuineness or falsity of arbitraging transactions.
g. Source/movement of funds and delivery in the scrip of so called arbitrageurs and their client/financiers i.e. RNA Builders (Narendra Gupta) who have acted as associate/financiers and delivered in the market being the ultimate beneficiaries of creation of a false market in the scrip of ARBL.
h. Various submissions made by various brokers and sub brokers in respect of transaction of the shares in ARBL including arbitraging transactions.
26. Shri Desai submitted that as regards Item No. (a) to (c) referred above, the enquiry proceeded against the broker member on the findings of the investigation conducted by SEBI were communicated to the broker member alongwith the relevant details vide notice dated July 6, 2001 issued by the enquiry officer. He submitted that in the said notice there was no reference of the said documents as the documents to be relied upon in the enquiry. As regards Item No. (d), it was stated that the enquiry officer vide his show cause notice dated July 6, 2001 forwarded the findings of the investigation alongwith the relevant details. The enquiry officer also forwarded the details of the trading done by Shri Rahul Bajaj in the scrip of ARBL and the findings of the investigation, that as regards Item No. (e), the enquiry officer had already forwarded the copy of SEBI's letter dated June 11, 2001 to BSE, to the broker member, that as regards Item No. (f) & (g), the details regarding the transaction of arbitrage were forwarded by the enquiry officer to the broker member. He submitted that the information sought vide Item No. (h) is not relevant as far as the present enquiry against the broker member is concerned. He submitted that all the relied upon documents were supplied to the broker member and no documents were relied upon without giving a copy to the broker member.
27. Shri Desai refuted the Appellant's contention that the order is not a speaking order in as much as it has not dealt with the Appellant's submissions. Shri Desai submitted that on a perusal of the order it is evident that the Respondent has stated the grounds adduced by the Appellant refuting the charges and also the Respondent's views thereon, that the fact that it has referred to the findings of the enquiry officer or that it has adopted certain portions verbatim from the enquiry report is not a flaw as has been alleged, that the Respondent is at liberty to rely or adopt the enquiry report if it is satisfied with the findings arrived at by the enquiry officer, that each and every charge stated in the show cause notice has been dealt with in the order by the Respondent.
28. Shri Desai submitted that from the undisputed factual position stated in the introductory paragraphs of the impugned order, it could be noted that the price of the scrip of ARBL at BSE was Rs. 91/- in the first week of October, 2000 which went upto Rs. 205/- on January 1, 2001 and jumped to a high of Rs. 320/- on March 8, 2001. He further submitted that on 9th March, 2001, BSE closed the normal trading at 2 P.M. and the price of the scrip at that time was Rs. 308.40, that on that day NSE was opened till 4.30 P.M. and the price of the scrip fell and closed at Rs. 266.75 and, therefore, on March 12, 2001 BSE adjusted the price of various scrips to that of NSE, including that of ARBL. He stated that the price of ARBL further dropped and touched a low of Rs. 78.50 on March 19,2001, that the fact is that ARBL scrip price started its downward movement from 9.3.2001, that the opening price at BSE on 12.3.2001 was adjusted to the closing price of the scrip at NSE on 9.3.2001 and the Appellant being a stock broker of several years' experience can not be unaware of such price adjustment procedure in vogue and still the Appellant executed an order for 1,50,000 shares at a price higher than the closing price, that the value of the said transaction was approximately Rs. 4.27 crores. Shri Desai referred to the observation in the impugned order that :
"in Settl No. 50 the aforesaid client of the broker member had a payment obligation of Rs. 1,43,09,651, against which he had made an advance payment of only Rs. 55 lakhs to the broker member. Despite having the debit balance on the account of Shri Harinarayan Bajaj, the Broker member had again purchased 1.5 lakah shares on March 12, 2001 worth approx. Rs. 4.27 crores. Shri Harinarayan Bajaj had a huge debit balance of Rs. 9.15 crores at the end of Settl No. A-51 with the broker member and thereby the broker member had suffered huge loss in its dealing with its client in the scrip of ARBL. It is also observed that the broker member had also defaulted in its pay in obligations to the exchange and subsequently the broker member was declared defaulter by the exchange in August 2001. It is thereby established that the broker member had allowed its aforesaid client to trade beyond his own financial capability and purchased huge quantity of shares despite having a debit balance on account of its client Shri Harinarayan Bajaj".
29. Shri Desai submitted that a Stock Broker's obligation is not only confined to his client., but he has also an obligation to the stock exchange, that he is not expected to do anything that would undermine the safety and security of the stock exchange. Learned Counsel submitted that the Appellant was not dealing in paltry quantities of shares, but in huge quantities of shares worth several crores of rupees in most of the trades, that it was therefore, all the more necessary for the Appellant to take adequate care and skill to ensure that even in an unforeseen event, the risk is covered.
30. Shri Desai submitted that the Respondent had enquired into the conduct of several brokers with reference to their role in trading with Shri Harinarayn Bajaj and his family members in the share of ARBL during the period August 2000 to March 2001 and that most of them were charged for their failure to exercise due care and skill in terms of the Code of Conduct required to be followed by Stlock Brokers as per the Stock Broker Regulations. The charges were adjudicated in each case and depending on the factual matrix of each case the Respondent decided as to whether the failure warranted imposition of penalty or not, that it is not tenable to say that the charges being common, the penal action also should be identicial in all cases. He reiterated that the decision in each case would depend on the facts specific to each case. In this context he referred to the quantum of ARBL shares traded by the Appellant as revealed in the tabular format provided in the order and submitted that most of the transactions are really huge in number and the value involved is substantial and not comparable to the case of LKP Securities or TJ Stock broking relied on by the Appellant. He submitted that it is an admitted fact that the Appellant had executed trades in the scrip of ARBL for Shri Harinarayan Bajaj amounting to a total volume of 23,35,814 shares (purchases) and 19,51,600 shares (sales) in Settlement Nos. A 37 to A 51 in BSE, that the Appellant had also allowed net carry forward of 2,20,556 shares at the end of Settlement No. A 50, that Shri Bajaj had a huge debit balance of Rs. 9.15 crores at the end of Settlement No. A-51 with the Appellant. He submitted that in the case of LKP the average trade per Settlement was 25,000 to 85,000 shares whereas single trade in the instant case is in lakhs, that LKP squared up the transactions except one, but they absorbed the loss, that LKP did not transact beyond its capacity. Shri Desai submitted that whereever the charge was established, the Tribunal had upheld the Respondent's decision imposing penalty as could be seen in TJ Stock's case that based on one instance of short sale by TJ Stock the Tribunal had upheld the order of suspension. He stated that in the Appellant's case it was not in a position to meet its financial obligation and consequently it risked the safety and security of the stock exchange. He submitted that the Appellant's case is in no way comparable to the case of LKP or TJ Stock Broking.
31. Learned Counsel submitted that BSE has already declared the Appellant a defaulter for its failure to meet its financial obligation and this failure was as a result of the failure of Shri Bajaj to meet its obligation towards the Appellant, that if the Appellant had not failed in exercising due skill and care such a situation would not have arisen.
32. Shri Desai submitted that the Appellant failed to properly evaluate the financial capability of its client is demonstrated from the fact that the client could not meet its obligation and for such a client the Appellant was carrying on trade without adequate back up to contain the risk. He stated that the Appellant lacked foresight, and failed to exercise due care and skill that it is not only that the Appellant did not ensure the capacity of the client, but also ignored its own financial capability to meet a crisis. He submitted that as a stock broker of Appellant's position it can not be unaware that the closing price of the scrip at NSE on 9.3.2001 was Rs. 266, that the Appellant on 12.3.2001 i.e. on the next trading day unhesitatingly brought the shares at Rs. 278/- that too huge quantity that a person or care and diligence would not have done so. In this context Shri Desai submitted that even on the Appellant's own assessment - rightly or wrongly - Shri Bajaj's networth was around Rs. 6 - 7 crores only, but the pay in obligation of Shri Bajaj was to the tune of Rs. 9.15 crores, that the argument now put forward by the Appellant that margin fell short as a result of revision from Rs. 76 to Rs. 132 etc. are all excuses to justify its failure, that it is difficult to believe that the Appellant trading in shares in such huge quantities in ARBL was unaware of the BSE circular issued on 9.3.2001 raising margin, till 12.3.2001. He submitted that the excuse that it had purchased the shares before the market opened, is also not acceptable as it was the Appellant's decision and in the prevailing scenario it should have been more alert and cautious in buying the scrip having come to know the price fall in NSE on 9.3.2001. In this context he referred to the observation made by the enquiry officer and accepted by the Respondent that:
"Sharedeal has also executed a buy order of 1,50,000 shares for Shri Harinarayan Bajaj on March 12, 2001 even though the client had a huge debit balance at the end of Settlement A 50 of BSE. The conduct of Sharedeal in allowing Shri Bajaj to ride on the market has not only made itself to suffer huge financial loss but also put the market place in danger. Even an ordinary and prudent man can imagine such series of transactions and huge speculative exposure would, by any standard, lead to serious consequences and repurcussions in the process of discovery of fair market price of a security and also poses risk to the stock broker".
33. Shri Desai submitted that the charges have been established and the penalty has also been imposed rightly.
34. I have carefully considered the rival contentions and the material on record and the provisions of law.
35. The impugned order is in the context of the market behaviour in terms of price and volume, witnessed in trading in the shares of ARBL, particularly in February - March, 2001. It is seen that the price of the scrip which was hovering around Rs.91/- in the 1st week of October 2000, reached Rs. 205/- on January 1, 2001 and further touched a high of Rs. 320/- on March 8, 2001. But the same crashed to Rs. 78.50 by March 19, 2001. Further the volumes traded in the scrips around 50,000 - 60,000 shares per day went up to the extent of 10-15 lacs shares per day in January - March, 2001. The Respondent's investigation prima facie revealed one Shri Harinarayan Bajaj and his son Shri Rahul Bajaj were the predominant traders in the scrip of ARBL during the period August 2000 to March, 2001 and held them responsible for the creation of false market. The investigation carried out by the Respondent indicated that various members of both NSE and BSE had aided and abetted Shri Harinarayan Bajaj in creating a false market, in the scrip of ARBL and they were also found to have not exercised due skill and care in their dealings. The Appellant was one among those brokers who were investigated in the said context. Though after the investigation and enquiry, the Appellant was absolved of the charge of aiding and abetting Bajajs, it was found wanting in exercising due skill and care in its dealings, as required in terms of Clause A(2) of the Code of Conduct prescribed in the 1992 Regulations.
36. The finding of the Respondent which is under challenge in the present appeal is confined to the following paragraphs:
"I have perused the extracts of the investigation report, the Enquiry Report, the reply filed by the broker member, the written submissions made on behalf of the broker member and also the submissions made on behalf of the broker member at the time of the personal hearing. It is observed that due to the transactions of Shri Harinarayan Bajaj and his son Shri Rahul Bajaj, the volumes in the scrip of ARBL went up to around 8-15 lakhs shares per day in the month of February & first week of March 2001 from 50,000 - 60,000 shares per day in Oct. 2000. It is also observed that the broker member had started dealing in the scrip of ARBL since October 2000.
The broker member had executed trades in the scrip of ARBL for its client Shri Harinarayan Bajaj amounting to a total volume of 23,35,814 shares (purchases) and 19,51,600 shares (sales) in settl Nos. A-37 to A-51 in BSE. The broker member had also allowed net carry forward of 2,20,556 shares at the end of settl No. A-50. The aforesaid transaction of the broker member on behalf of its client had enabled the client to build up huge positions in the market in the scrip of ARBL. It is also worth mentioning here that no other brokers other than the broker member had purchased in the scrip on behalf of Shri Harinarayan Bajaj and persons acting in concert with him in Settl No. 51. At the end of Settl No. 51/2000-2001 Shri Harinarayan Bajaj had a total outstanding of Rs. 9,15,57,597 with the broker member. Therefore, it is established that the broker member had given high exposure to its clcient, Shri Harinarayan Bajaj and allowed him to trade beyond its own financial capability.
It is observed that in Settl No. 50 the aforesaid client of the broker member had a payment obligation of Rs. 1,43,09,651/- against which he had made an advance payment of only Rs. 55 lakhs to the broker member. Despite having the debit balance on the account of Shri Harinarayan Bajaj, the broker member had again purchased 1.5 lakh shares on March 12, 2001 worth approx 4.27 crores. Shri Harinarayan Bajaj had a huge debit balance of Rs. 9.15 crores at the end of Settl No. A-51 with the broker member and thereby the broker member had suffered a huge loss in its dealing with its client in the scrip of ARBL. It is also observed that the broker member had also defaulted in its pay in obligations to the exchange and subsequently the broker member was declared defaulter by the exchange on August, 2001. It is thereby established that the broker member had allowed its aforesaid client to trade beyond his own financial capability and purchased huge quantity of shares despite having a debit balance on account of its client Shri Harinarayan Bajaj.
It is observed that during the period from August 2000 to March 2001, majority of the volume of trades executed by the broker member was for Shri Harinarayan Bajaj and in addition the broker member also executed trades for other clients and sub broker in the scrip of ARBL. The broker member had given a very high exposure to its client by executing series of trades worth buy positions ranging from 29,270 to 3,97,903 shares. It is relevant to note here that the broker member had no dealings with Shri Harinaryan Bajaj in the past. At the end of Settl No. A-49 the broker member had an open outstanding position of 92,653 shares in the name of its aforesaid clients. Despite the same the broker member had again purchased a huge quantity of 3 lakh shares at the start of the Settl No. A-50 at a time when the price of the scrip was ruling at its 52 weeks high. In fact, there is a duty on the part of the broker member to know about the financial soundness of its clients before entering into large scale transactions and therefore the broker member had failed to exercise due care and skill in its dealings with the client, Shri Harinarayan Bajaj.
It is observed that the broker member had traded beyond the financial capability of its client and also traded beyond its own financial capability and thereby failed to exercise due care and skill as mandated by Clause A( 2 ) of the Code of Conduct prescribed under the said regulations. The broker member also purchased huge quantity of shares despite having a debit balance on account of its client, Shri Harinarayan Bajaj and, therefore, I do not find any merit in the request for re-investigation made by the broker member.
The Hon'ble High Court of Mumbai passed an order dated July 26, 2001 in WP No. 1759/2001 in which the broker member is also a party filed against SEBI & Ors. The Hon'ble High Court vide its aforesaid order had observed that "enquiry before SEBI will proceed independently of the pendency of the present petition". As regards the copies of the investigation report are concerned the Hon'ble High Court had observed that "it will be for SEBI to decide and then make available those reports to the extent they are concerning to the present petitioners". In this connection, it is observed that the broker member vide letter dated August 23, 2001 had requested for following documents when the enquiry was pending:
a. Report of BSE submitted to SEBI after investigating into the transactions into the shares of ARBL in January 2001.
b. BSE Report in the transaction in the shares of ARBL and submitted in the month of May/June 2001.
c. NSE Report submitted to SEBI after investigating into the transactions into the shares of ARBL in May/June 2001.
d. SEBI's Report in the transaction in the shares of ARBL.
e. SEBI's directive to NSE/BSE on annulment and pay out of the transactions in the shares of ARBL.
f. SEBI's report in the matter of finding out the genuineness or falsity of arbitraging transactions.
g. Source/movement of funds and delivery in the scrip of so called arbitrageurs and their client/financiers i.e. RNA Builders (Narendra Gupta) who have acted as associate/financiers and delivered in the market being the ultimate beneficiaries of creation of a false market in the scrip of ARBL.
h. Various submissions made by various brokers and sub brokers in respect of transaction of the shares in ARBL including arbitraging transactions.
As regards Item No. (a) to (c) referred above, it has been observed that the enquiry proceeded against the broker member on the findings of the investigation conducted by SEBI which were already communicated to the broker member alongwith the relevant details vide notice dated July 6, 2001 issued by the Enquiry Officer. It is also relevant that in the said notice there was no reference of the said documents as the documents to be relied upon in the enquiry. As regard Item No.(d), it is observed that the Enquiry Officer vide his show cause notice dated July 6, 2001 forwarded the findings of the investigation alongwith the relevant details. The Enquiry Officer also forwarded the details of the trading done by Shri Rahul Bajaj in the scrip of ARBL and the findings of the investigation. As regards Item No.(e), the Enquiry Officer had already forwarded the copy of SEBI's letter dated June 11, 2001 to BSE, to the broker member. As regards Item No. (f) & (g), the details regarding the transaction of arbitrage were forwarded by the Enquiry officer to the broker member and Item No.(h) is not relevant as far as the present enquiry against the broker member is concerned.
It is observed that all the relied upon documents were supplied to the broker member and no documents were relied upon without giving a copy to the broker member. Therefore, I do not find any reason to re open the request made by the broker member.
The above mentioned acts of the broker member clearly indicates that the broker member had traded in the scrip beyond the norms for normal stock broking business and thereby violated Clause A (2) of the Code of Conduct prescribed under Regulation 7 of the said Regulations which state as follows:
Schedule II A General
1)...........
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.
In view of the above circumstances, it is concluded that the broker member had failed to exercise due care and skill in its dealing with its client and thereby violated Clause A(2) of the Code of Conduct as prescribed under Regulation 7 of SEBI (Stock Broker and Sub Broker) Regulations, 1992. It is also concluded that the broker member had given high exposure to its client, had allowed the client to take position which is beyond the client's fiancial capability and also traded beyond its own financial capabilities. The broker member also purchased huge quantity of shares despite having a debit balance on account of its client, Shri Harinarayan Bajaj and, therefore I am justified in imposing the penalty of suspension of the certificate of registration of the broker member for a period of nine months.
Therefore by considering the above facts and circumstances, I agree with the recommendations given by the Enquiry Officer and therefore under the provisions conferred upon me under Section 4(3) of the SEBI Act, 1992 and under Regulation 29(3) of SEBI (Stock Brokers & Sub Brokers) Regulations, 1992, I hereby suspend the certificate of registration granted to M/s. Sharedeal Financial Consultants Pvt. Ltd., Member, the Stock Exchange, Mumbai for a period of 9 months w.e.f. 01/10/2002 for violating Clause A(2) of Schedule II of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992."
37. The Respondent's objection to the maintaibility of the appeal on the ground that the reliefs sought in the appeal are beyond the purview of this Tribunal, in my view is unfounded. The Respondent itself has described the impugned order as an "order under regulation 29(3) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992, against M/s. Sharedeal Financial Consultants Private Limited, member, The Stock Exchange, Mumbai." The Chairman, Securities and Exchange Board of India, who has passed the impugned order has clearly stated that order was passed by him in exercise of the powers conferred upon him under section 4(3) of the Act and regulation 29(3) of the Stock Broker Regulations. Section 4(3) of the Act, inter alia empowers the Chairman "to exercise all powers and do all acts and things which may be exercised or done by that Board". Regulation 29(3) empowers the Board to pass appropriate orders against stock brokers, as per the provisions of the Stock Broker Regulations. The impugned order is one passed by the Chairman in exercise of the authority conferred on him vide the statute. It is an order of the Board. The Respondent has ordered suspension of the certificate of registration granted to the Appellant for a period of 9 months. In terms of section 12 of the Act a stock broker is not entitled to carry on its stock broking activities without a live certificate of registration. In the event of suspension or cancellation of the registration certificate, during the currency of the order the Stock Broker cannot carry on the stock broking activities. Therefore, the effect of the impugned order suspending the certificate of registration is that the Appellant can not carry on its business of stock broking during the suspension period of nine months. The Appellant has also stated that it is aggrieved by the said order. Therefore, it can not be said that the Appellant is not a person aggrieved by the impugned order to be entitled to prefer the appeal. Admittedly the impugned order is one passed by the Securities and Exchange Board of India, and the Appellant is stated to be aggrieved by the order. According to section 15T of the Act any person aggrieved by an order made by the Securities and Exchange Board of India, may prefer an appeal to the Securities Appellate Tribunal. It is not the Respondent's contention that the impugned order is not made by the Securities and Exchange Board of India and that by the said order the Appellant is not aggrieved. The Respondent's attack is on the ground that the reliefs sought by the Appellant are such that they do not come under the purview of this Tribunal. In this context I would like to make it clear that maintainability of the appeal under section 15T is not dependant on the nature of reliefs sought in the appeal. The Tribunal is empowered to refuse anyone or all the reliefs sought in an appeal. Ultimate outcome of the appeal is not the test of maintainability. The test of maintainability of an appeal is not the ambit of the 'prayer clause' in the appeal. The test is whether the requirements of section 15T have been fulfilled i.e. whether the order appealed against is one passed by the Securities and Exchange Board of India and if the answer is in affirmative, whether the Appellant can be considered to be aggrieved by the said order. In the instant case I find that both the requirements of Section 15T have been fulfilled. Therefore, the Respondent's plea on the maintainability of the appeal is untenable.
38. The Appellant had submitted that the order was not passed following the principles of natural justice in as much as it was denied of certain documents. It was also submitted that the order has failed to give the reasons.
39. With reference to the allegation that the Respondent had failed to furnish the material information, the Appellant had relied on an interim order passed by the Hon'ble Bombay High Court in a Writ Petition no. 1759/2001 filed by certain persons including the Appellant against the Respondent and others. The Hon'ble High Court vide its order dated 26.7.2001 has viewed that "As far as prayer clause (b) (iv) is concerned, copies of the investigations reports are sought. As far as reports of investigation made by Respondent NO. 2 and 4 are concerned, these reports are already submitted to SEBI and it will be for SEBI to decide and then make available those reports to the extent they are concerning to the present petitioners. Enquiry before SEBI will be proceeded independently of the pendency of the present petition." (emphasis supplied) It is thus clear that the extent of the disclosure of the investigation report was left to the Respondent. It is noted that the Appellant on 23.8.2001 i.e. subsequent to the order referred to, had written to the enquiry officer seeking following documents:
1. Report of Stock Exchange submitted to SEBI after investigating into the transactions into the shares of ARBL in January 2001.
2. BSE Report on the transactions in the shares of ARBL and submitted in the month of May/June 2001.
3. NSE Report submitted to SEBI after investigating into the transactions into the shares of ARBL in May/June 2001.
4. SEBI's Report on the transactions in the shares of ARBL.
5. SEBI's directive to NSE/BSE on annulment and pay out of the transactions in the shares of ARBL.
6. SEBI's report in the matter of finding out the genuineness or falsity of arbitraging transactions.
7. Source/movement of funds and delivery in the scrip of so called arbitrageurs and their client/financiers i.e. RNA Builders (Narendra Gupta) who have acted as associate/financiers and delivered in the market being the ultimate beneficiaries of creation of a false market in the scrip of ARBL.
8. Various submissions made by various brokers and sub brokers in respect of transaction of the shares in ARBL including arbitraging transactions.
40. It has been stated in the order that as regards particulars called for vide item (1) to (3) in the Appellant's letter, "the findings of the investigation conducted by SEBI was already communicated to the broker member along with the relevant details vide notice dated July 6, 2001 issued by the Enquiry Officer." It has been stated further in the order that "...in the said notice there was no reference of the said documents as the documents to be relied on in the enquiry". As regards the SEBI report called for in item (4) of the letter, the Respondent has stated that the enquiry officer alongwith his notice dated 6.7.2001 forwarded the findings of the investigation alongwith the details, and also the details of the trading done by Shri Rahul Bajaj in the scrip of ARBL. With reference to the request as per item 5, the Respondent has stated that the enquiry officer had already forwarded copy of the SEBI letter dated 11.6.2001 addressed to BSE, to the Appellant that with reference to the particulars required vide item 7 it has been stated that the details regarding the transaction of arbitrage were also forwarded to the Appellant. According to the Respondent all the documents relied upon by it were supplied to the Appellant. I have perused the Appellant's request referred to above and the show cause notice. In my view material to the extent required to answer the charge specific to the Appellant, has been furnished to the Appellant. The Respondent can not be said to be at fault by not obliging the Aappellant by giving the investigation reports covering the entire market upheaval and other entities involved. The Respondent is not required to make available, the documents which it is not relying on with reference to the charge levelled against the Appellant. Therefore the allegation that the Appellant was denied of the documents to enable it to defend its case in my view is unfounded.
41. The allegation that the Respondent has simply reproduced the obervation made by the enquiry officer in his report and the Appellant's submissions were not considered while passing the impugned order, as I could see from the order, is not correct. I agree with Shri Mehta's submission that the order should deal with the observations of the enquiry officer and also the submissions thereon by the Appellant. I do not find anything wrong on the part of the Respondent in accepting the version of the enquiry officer verbatim provided the Respondent after considering the Appellant's submissions agrees with the observation made by the enquiry officer. A speaking order is a requirement of transparency and the transparency enhances the credibility. The observation made by the Hon'ble Supreme Court in HVPNL V Mahabir (2001) 10 SCC 659 while considering an appeal against an order passed by the State Consumer Disputes Redressal Commission, Haryana provides the guidance in this regard:
"The Appellate forum is bound to refer to the pleadings of the case, the submissions of the counsel, necessary points for consideration, discuss the evidence and dispose of the matter by giving valid reasons"
42. Though the said observations are with reference to the orders in first appeal, the requirement set in therein, in my view is applicable to adjudication cases also. An order should speak for itself. The impugned order in my view is reasonably reasoned and can not be dubbed as a non speaking order.
43. The Respondent in its order has held the Appellant guilty on the following grounds. The gist of the finding is that "the broker member had failed to exercise due care and skill in its dealing with its client and thereby violated clause A(2) of the Code of Conduct as prescribed under regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992. It is concluded that the broker member had given high exposure to its client, had allowed the client to take position which is beyond the client's financial capability and also traded beyond its own financial capabilities. The broker member also purchased huge quantity of shares despite having a debit balance on account of its client Shri Harinarayana Bajaj."
44. The Appellant is a Stock Broker. It has a membership to trade in securities on BSE. The broad regulatory regime applicable to Stock Brokers and Sub Brokers under the Act is the Stock Broker Regulations. According to regulation 7 of the Stock Broker Regulations "the stock brokers holding a certificate shall at all times abide by the Code of Conduct as specified at Schedule II". Schedule II enumerates the Code of Conduct for Stock Brokers. Clause A(2) of the Code, which the Appellant is stated to have violated is as follows:
"(2)Exercise od due skill and care: A stock broker shall act with due skill care and diligence in the conduct of all his business"
45. "Due skill, care and diligence" has not been defined in the Act or in the regulations, obviously for the reason that it is not amenable to a precisedefinition. Due skill, care and diligence, to a larger extent is a matter of subjectivity. However, according to the enquiry officer "Due skill and care as used in clause A(2) of Schedule II of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 would mean, atleast such care and skill as a man of ordinary prudence would exercise under similar circumstances". He has applied the said test while assessing the conduct of the Appellant.
46. The charges against the Appellant enquired into by the enquiry officer are broadly of two categories i.e. (1) failure to exercise due skill and care and (2) violation of regulation 4 of FUTP Regulations. Failure to exercise due care and skill is alleged holding that the Appellant:
(i) by virtue of its trading in the scrip of ARBL on behalf of Shri Harinarayan Bajaj has failed to exercise due skill and care in its dealings,
(ii) traded in the scrip of ARBL beyond the financial capacility of Shri Harinarayan Bajaj
(iii) traded in the scrip of ARBL beyond the Appellant's own financial capacity
(iv) despite having debit balance on account of Shri Harinarayan Bajaj, purchased 1,50,000 shares on 12.3.2001 worth approx. Rs. 4.27 crores
47. The charge that the Appellant violated regulation 4 of the FUTP Regulations is on the ground that:
The Appellant aided and abetted Shri Harinarayan Bajaj and his family members in creating a false and misleadding market in the scrip of ARBL.
48. As far as the violation of regulation 4 of the FUTP Regulations is concerned, the enquiry officer recommended to take a lenient view and give benefit of doubt to the Appellant. It is noted that the enquiry officer in this regard had viewed that:
"Sharedeal had executed series of transactions for Shri Harinarayan Bajaj. Most of the trades were squared off and a very in significant portion of the trading resulted in deliveries. Sharedeal had also allowed the client to carry forward substantial quantity of shares. The trades were primarily in the nature of speculative transactions without any intention of transfer of beneficial ownership as can be seen from the trading data. This raises a suspicion on the role of Sharedeal in its dealings with Shri Harinarayan Bajaj in the scrip of ARBL. However, from the material available, it is not possisble to draw conclusive inference that Sharedeal had the intention to artifically raise or depress the price of the scrip of ARBL or aided and abetted Shri Harinarayan Bajaj in creation of flase market. There is no proof that Sharedeal was aware of Mr. Bajaj's dealings with other brokers. Further, as per its statement Sharedeal or its directors have not traded in the scrip of ARBL. In view of this, a lenient view may be taken and benefit of doubt given to sharedeal on this charge."
49. From the said observation it is noted that the enquiry officer had viewed that "the trades were primarily in the nature of speculative transactions." In my view speculation is a part of stock market trading and as such speculation per se is not an offence. But manipulation of market is not so. It is quite serious and deserve severe action. More severe the penalty, more rigorous the test of evidence. Though the enquiry officer has not totally absolved the Appellant of the charge of manipulation, in the absence of adequate material "to draw conclusive inference" he recommended to "take a lenient view and give benefit of doubt to the Appellant." It is seen from the impugned order that the Respondent had taken note of the said recommendation of the enquiry officer and no contrary view is taken. Therefore, the only surviving charge is the "Appellant's failure to exercise due skill and care" and the penalty is imposed on the finding on the said charge. The four counts of the failure, stated to have been committed by the Appellant have been stated in the earlier part of the order. The first count i.e. "the Appellant by virtue of its trading in the scrip of ARBL on behalf of Shri Harinarayan Bajaj has failed to exercise due skill and care in its dealings" in my view is very vague and general. It is to be noted that there was no prohibition in dealing in the scrip of ARBL. There was also no prohibition in trading for Shri Bajaj. On the contrary, the following submissions of the Appellant, remain unrebutted:
"Sharedeal, in its reply dated 23.08.2001, submitted that we were not aware that Mr. Harinarayan G. Bajaj was also trading through other members of BSE/NSE. Even the same was not disclosed by him in his client registration form. Mr. Harinarayan G. Bajaj had met all his commitments for and upto vallan no. 49 in the normal course of business. There was no default on any pay-in / margins etc. Mr. Bajaj acted as a trader in all 'A' group scrips only and even took deliveries of several scrips from time to time."
xxxxxxxxxx "We executed the transactions of Mr. Bajaj in the regular course of business as he was doing with us, whereby he used to square up within the same settlement regularly and without any problem from Vallan No. 37 to Vallan No. 50".
xxxxx "We did not encounter any difficulty in obtaining margin payment or pay-in from vallan no. 37 to vallan no. 49 and not even a single cheque had bounced earlier for us to suspect any malafide intention or anticipate any big problem of his not meeting any of his commitment for the dealings." (Sharedeal's version noted by the enquiry officer).
50. The other three counts of failure stated at (ii), (iii) and (iv) are specific. In this context it is noted that both the parties had placed considerable reliance on the trading data furnished in the impugned order. A close look at the same is considered necessary. The relevant data furnished in the order under the heading "Trading, Deliviery & Carry Forward (Badla) Position of Amara Raja Batteries Ltd., from Aug. '00 to March 01" is extracted below for quick reference"
Settl.No. Purchase Sales C/f Delivery A-37 29,270 Nil 29,270 Nil A-38 136355 55,000 110,625 Nil A-39 50,000 55,000 105,625 Nil A-40 68,100 53,900 119,825 Nil A-41 90.500 104,325 106,000 Nil A-42 1377779 133,772 106,007 47660 A-43 100,000 106,520 94,487 5,000 A-44 178,608 141,345 131,750 Nil A-45 186,967 209,550 99,667 9,500 A-46 194,966 177,682 116,951 Nil A-47 1587296 166,320 108,769 158 A-48 202,000 203,654 107,115 Nil A-49 255,070 254,532 92,653 15,000 A-50 03-05-01 03-07-01 300,000 2,370 Nil 250,000 03-09-01 95,533 40,000 397,903 290,000 220,556 (20,000) A-51 03-12-01 150,000 626 369,930 Total 2,335,814 1,951,600
51. Even though the period for which the trading data is furnished refers to August 2000 to March 2001, the Appellant had commenced trading for Shri Bajaj only from December, 2000 i.e. from Settl. A-37 onwards. There is no dispute, as far as the details are concerned. The dispute is on the finding arrived at on the basis of the details. It is an admitted fact that the Appellant had executed trades in the scrip of ARBL for Shri Bajaj for 23,35,814 (purchases) and 1951600 shares (sales) in Settlement No. A-37 to A-51. The total value of the shares so traded runs to several crores. The Appellant had allowed net carry forward of 2,20,556 shares at the end of Settlement No. A-50. On a aperusal of the tabulated details referred to above, it is noted that the Appellant had given at times huge buy positions. In this context the observation made by the enquiry officer is worth noting:
"Sharedeal had given a very high exposure to Shri Harinarayan Bajaj by executing series of trades with buy positions ranging from 29,270 shares to 397903 shares. It should be noted that there are no quantitative restrictions laid down with regard to execution of each trade and the same is left to the prudential risk management of the stock broker".
52. It is noted that the specific risk management norms are left to be decided by the concerned stock broker. In the instant case the crucial factor is that whether the risk management measure taken by the Appellant was really adequate or the Appellant had taken chance, leaving the risk factor uncovered. It is evident from the trading data available that the carry forward position of Shri Bajaj was very high in certain settlements. It is true that ARBL scrip being a 'A' Group scrip, carry forward was allowed with adequate margin back up. Perhaps any diligent broker would have taken a little more pain to actually find out Shri Bajaj's actual creditworthiness a little more carefully during the trading period i.e. Sett 37 to Sett 50 in view of his purchase position pattern. The Appellant seems to have not done any exercise in this regard. It is noted that the average carry forward position in each settlement during settlements A-37 to A-49 was around 1 lakh shares. The total value of the shares traded by the Appellant for Shri Bajaj at the then prevailing market rate was very high. Delivery taken by Shri Bajaj during the said period was negligible. It is noted that at the end of settlement No. A-49, the Appellant had an outstanding open position of 92653 shares in the name of Shri Bajaj, but the Appellant purchased 3 lakh shares at the start of Sett. A-50, when the price was ruling its 52 weeks' high. According to the Appellant in the absence of any specific norms laid down by the Respondent, it had traded for Shri Bajaj, based on its subjective satisfaction. It is true that in the absence of any specific parameter, as stated by the Appellant, the Appellant was at liberty to decide the exposure limit, following due care and diligence. The Appellant's subjective satisfaction theory in my view would survive only if it had exercised such care and diligence which a man of ordinary prudence and caution would exercise under similar circumstances. The material on record gives an impression that the Appellant had failed to exercise such care and diligence. The trading pattern shows unusual carry forward position indicating that Shri Bajaj was speculating heavily and it was not totally risk free. Excessive speculation can some times end up in disaster. Breeze can turn into a typhoon. It is in this context that due skill and care considered necessary to ensure safety. As stated earlier, speculation in stock market operations by a trader by itself is not an offence. But on watching the speculative trend - such a high magnitude - in Shri Bajaj's trading, any person in the normal course would have kept his "antenna" high and traded for Shri Bajaj more cautiously, and certainly would have desisted from purchasing huge quantity, as it did in the starting of Settlement No. 50. Despite the fact that the Appellant was having an outstanding open position of 92,653 shares in the name of Shri Bajaj, the Appellant unhesitatingly purchased 3 lakh shares at the start of Settlement No. 50. The Appellant's submission that the trades are executed as per the direction/instruction of the client is not disputed. The dispute is regarding the extent of due skill and care required to be exercised by the broker while trading for his client. It is noted that the amount involved in the transaction was huge. The Respondent quoting the Appellant has stated that "an exposure limit of 1,00,000 shares in ARBL for net carry forward at the end of the Vallan was given" but in Settlement No. 50 and 51 this limit was exceeded by Shri Bajaj. It is noted that 2,20,556 shares were carried forward from Settl. 50 and 369930 shares from Settlement No. 51. It is rather surprising that the Appellant has put the exposure limit in terms of number of shares, and the Respondent also seems to have accepted the said parameter little realising that the 'margin deposit' required to be obtained is relatable to the value of the transaction and not simply in terms of the number of shares as such. In any case, even on a rough estimate of the total value involved on the basis of the then prevailing market price of the ARBL scrip, the amount involved was huge. It is in this context the factual finding of the Respondent based on the following observation made by the Respondent gains credence:
"Sharedeal has allowed the client to take positions, which is beyond the client's financial capability. During the oral hearing, Sharedeal submitted that before executing trades for Shri Bajaj, it has not only taken initial deposit of Rs. 1.5 lakhs from him in December 2000 but also made enquiries about his networth. It was told that Shri Bajaj has huge properties in Marine Drive and Fort area office, worth Rs. 6 to Rs. 7 crores and therefore it was convinced that Shri Bajaj is a genuine trader. Sharedeal further submitted that it was never aware that Shri Bajaj was dealing with other brokers. Based on his networth as explained above as well as his regular payments of margins and pay-ins, it could never doubt the trades executed for Bajaj, were beyond his financial position. However, Sharedeal had not shown any evidence to establish its claim that it was satisfied of Shri Bajaj's networth. In view of the fact that Shri Bajaj had defaulted a huge sum of Rs. 9.15 crores to Sharedeal, its submissions are not convincing and hence can be concluded that Sharedeal had allowed Shri Bajaj to expose trading in securities beyond his financial capabilities."
53. I have considered the submissions by the Appellant. It has attributed the unexpected market fiasco and the revision of the margin requirement, as the cause for the failure. The Appellant's argument that it came to know of the revision of margin brought in to effect vide BSE Circular of 9.3.2001 only on 12.3.2001 and it had traded for Shri Bajaj based on the unrevised margin is difficult to accept. If it had been vigilant it would not have missed such a crucial circular which has a bearing on trading. The very admission of the Appellant that it came to know of the margin revision effected on 9.3.2001 only on 12.3.2001 i.e. after 2 days - by itself goes against the Appellant's contention that it had taken due care and acted diligently. A person trading in securities can not miss such an important decision of BSE. Yet another factor is the price at which the Appellant purchased shares on 12.3.2001. The Appellant cannot be unaware of the fact that ARBL scrip closed at Rs. 266 at NSE on 9.3.2001 and that the BSE opening price would be adjusted to the said rate. In this context it is noted that on 9.3.2001 closing price of ARBL scrip (at 2 PM) on BSE was Rs. 308, but by the time NSE closed at 4.30 PM on the same day, the price was Rs. 266, which a Stock Broker dealing in the scrip can not miss. But the Appellant without any rhyme or reason purchased huge quantity of shares at a high price of Rs. 278/-. The conduct of the Appellant by purchasing huge quantity of shares at such a price in such a situation in my view is not demonstrative of exercise of proper due care and diligence. It is an admitted fact that the Appellant executed a buy order of 150000 shares for Shri Bajaj on 12.3.2001 even though the client had a huge debit balance at the end of Sett. 50. The clouds were gathering. The Appellant refused to see it for reasons best known to it. It is seen from the impugned order that when the scrip price was nose diving, the Appellant was the only broker who ventured to purchase huge quantum of shares. If the Appellant had been sensitive to the risk factor and exercised due care and diligence it would not have made the purchase at that point of time. The Appellant's argument that BSE had collected information about the trading pattern in ARBL scrip by Shri Bajaj in January 2001 itself and if BSE had forewarned, the Appellant would have stopped trading for Shri Bajaj, is not a valid argument to absolve the Appellant from its own failure. It is a fact that the Appellant had given huge exposure to Shri Bajaj and ultimately Shri Bajaj could not meet his obligation. This is clearly indicative of the fact that the Appellant had allowed Shri Bajaj to expose trading in securities beyond his financial capabilities. Due skill, care and diligence in dealing with a client is not a one time measure. It is a continuing exercise and a stock broker is required to take appropriate decision on the basis of the ongoing developments and cannot remaian complacent.
54. It is on record that the Appellant had submitted before the enquiry officer that its net worth was in the region of Rs. 2 crores excluding the value of the membership card which at that point of time was reportedly valued approx.at Rs. 2.5 crores. It had also stated that "besides, we get exposure limit based on Base Minimum Capital which was in excess of Rs. 1 crore, which give trading limit of Rs. 33 crores and 20 times for the settlement i.e. 20 crores". The best judge of the Appellant's financial capacity is the Appellant itself. The judge should be realistic. But in Appellant's case it had made an erroneous judgement, as has been proved by the subsequent events. The fact that the Appellant could not meet its obligation to BSE clearly demonstrates that it had traded beyond its financial capability. This situation was created by trading for a client who was not in a position to meet his obligation. The submission that the crisis in ARBL scrip case was an unexpected development and the failure to meet the financial obligation should be viewed as one not specific to the Appellant alone, is not a satisfactory one. The true test for the "risk management measures" is the efficacy of the measures in position to meet a crisis situation. In the Appellant's case it is evident that it had not acted diligently. It traded beyond its own capacity and brought grief not only to itself but also risked the exchange mechanism and as a ressult BSE declared the Appellant a defaulter. The Appellant had tried to show that it was a victim of a larger conspiracy, but the fact is that it invited problem for itself because of its failure to follow healthy norms. The Appellant is not a novice to trading in securities. It is an expericed broker with large clintle. It was its duty to adopt measures to contain the risk in the event of any untoward market behaviour in the scrip which it was heavily dealing. Not only the Appellant failed to take measures with care and diligence but also acted negligently ignoring the writing on the wall. I have come to the above conclusion after considering all the submissions made by the Appellant and the material available on record.
55. The Appellant's contention that it is not a case to warrant 9 months' suspension of the certificate of registration is untenable. This Tribunal's order in LKP and T. J. Stock Broking cited in support by the Appellant, has no application to the facts of the Appellant's case. In both the said cases, the brokers had not failed to discharge their obligation towards the exchange. In the LKP case the Respondent in its order had observed that the "Appellant had done only few transactions for Bajaj, that they were primarily squared off transactions except one". The same observation is found in T. J. Stock Borking's case also. It is noted that T. J. Stock Broking started trading in the scrip ARBL from February 2001 and during the period it had purchased 90,000 shares and sold 120000 shares from Settlement 49 to 51. LKP had traded for Shri Bajaj in 3 Settlements in Sett. No. 07 to N 10 in NSE, that the quantum purchased and sold was 2,50,000 shares and 195000 shares respectively. In settlement No. 10 it had purchased 55,000 shares for Bajaj and sold 18338 shares on 13.3.2001 @ Rs. 188/- and balance shares were received by it in the pay out. The conduct of the parties in the said cases are not at all comparable to the conduct of the Appellant in the context of exercise of due skill and care.
56. It is on record that the Respondent had made available all the documents including the relevant portion of the investigation report dealing with the Appellant's conduct, relied on by the Respondent in its order. Therefore, the Appellant's prayer to make available "complete investigation" report in my view is not tenable. With reference to the Appellant's prayer to direct the Respondent to re-examine the case of ARBL, to re investigate the entire transactions in ARBL scrip and a total investigation by an independent agency, in my view is extraneous to matter under consideration in the appeal, as the present appeal is directed against the Respondent's order suspending the Appellant's certificate of registration on account of failure to exercise due skill and care under the Stock Broker Regulations.
57. For the reasons stated above, I am of the view that the impugned order is to be sustained.
58. Appeal dismissed.