Securities Appellate Tribunal
M/S. Ganpati Finsec Pvt. Ltd. & Others vs Sebi on 19 March, 2008
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.178 of 2007
Date of decision: 19.03.2008
M/s. Ganpati Finsec Pvt. Ltd.
Mr. Devender Mittal
Smt. Ritu Mittal
Dr. K.C.Mittal .....Appellants
Versus
Securities and Exchange Board of India
Central Depository Services (India)Ltd. ......Respondents
Mr Pradeep Sancheti Advocate with Mr. Shrinivas and Mr Vineet Jagtap Advocates for Appellants.
Mr. Kumar Desai Advocate with Mr.L.S. Shetty, Mr.A.S.Khan and Ms. Ingale Advocates for Respondent.no.1 Mr. Mayank Mehta Advocate with Mr. Devesh Juvekar Advocate for Respondent no.2 CORAM : Justice N.K. Sodhi, Presiding Officer Arun Bhargava, Member Utpal Bhattacharya, Member Per : Justice N.K. Sodhi, Presiding Officer (Oral) This order will dispose of two Appeals no. 178 of 2007 and 04 of 2008 both of which arise out of the same impugned order and in which questions of law and fact are similar. Challenge in the appeals is to the order dated September 28, 2007 passed by the whole time member of the Securities and Exchange Board of India (for short the Board) restraining, among others, the appellants from accessing the securities market and prohibiting them from associating with it to buy, sell or deal in securities either directly of indirectly for a period of three years.
SAM Global Securities Limited, (for short SAM) is a member of the Bombay Stock Exchange and a registered stock broker with the Board. SMC Global Securities Limited, (for short SMC) is also a registered stock broker and a member of the National Stock Exchange. According to M/s. Ganpati Finsec Pvt. Ltd. (for short Ganpati) which is the appellant in Appeal no. 178 of 2007, SAM had a trading terminal at Sriganganagar in the state of Rajasthan and SMC had a similar terminal at Abohar in the state of Punjab. The distance between Abohar and Sriganganagar is about 30-35 kilometers. SMC had a 2 branch office at Abohar which according to Ganpati was being managed by one Dheeraj Kumar Madaan (hereinafter referred to as Madaan). According to the Board, the office at Abohar was being looked after by Ganpati and Madaan had been designated to operate the trading terminal. It is common ground between the parties that Madaan while trading on behalf of the clients based at Abohar, was executing all the trades through SMC as the broker and while doing so he used the client code of Ganpati. It is pertinent to mention here that Ganpati was a client of SMC and the latter had provided the former with a client code which Madaan had been using. It is also not in dispute that Madaan played a fraud with the investors on whose behalf he had been trading and had absconded in June 2005 with their money and shares. Madaan is not an appellant before us and, therefore, we are not concerned with his role in the episode. Since the trades executed by Madaan had used Ganpati's client code, the latter was charged by the Board as having acted as a sub broker in those trades without being registered with the Board as such. Section 12 of the Securities and Exchange Board of India Act 1992 (for short the Act) mandates that no stock broker or sub broker shall buy, sell or deal in securities except under and in accordance with the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under the Act.
On receipt of complaints from a large number of inventors based at Abohar, the Board initiated investigations and while those were pending, an ex parte ad interim order dated October 05, 2005 was passed restraining, among others, Ganpati and its directors from buying, selling or dealing in securities or being associated with the securities market in any manner whatsoever.
A notice dated February 01, 2007 was issued to Ganpati and its directors calling upon them to show cause why the ex parte order dated October 05, 2005 be not confirmed as Ganpati had acted as an unregistered sub broker. It had also been alleged in the notice that Ganpati and its directors had circumvented the ex parte order and they were also required to show cause why a penalty be not imposed on them for that violation as well. Ganpati filed its reply on February 20, 2007 controverting the allegations. It is not disputed in the reply that Madaan while executing trades on behalf of Abohar based clients through SMC as the broker had used Ganpati's client code. On a consideration of the material available with the Board including the reply and the statements recorded 3 during the course of the investigations, the Board came to the conclusion that Ganpati had executed a franchisee agreement with SMC on September 19, 2002 where under the franchisee (Ganpati) was desirous of becoming affiliated with SMC with the object of allowing its clients to deal through SMC in the primary and secondary markets. Relying upon the statement of Shri Devender Mittal Director of Ganpati recorded during the course of the investigations the Board also found that Madaan has executed the trades on behalf of Abohar based clients through SMC and had used Ganpati's client code. From this, it inferred that Ganpati acted as a sub broker in those deals and since it was not registered with the Board as a sub broker, the provisions of section 12 of the Act stood violated. The Board also found that despite the ex parte restraint order passed on October 05, 2005, Ganpati circumvented that order and brought in M/s Ansh Bharti a proprietorship concern of Amit Mittal the younger brother of Devender Mittal who is a director in Ganpati. In view of these findings, the Board not only confirmed the ex parte interim order of October 05, 2005 but also held, among others, Ganpati and its Directors and M/s Ansh Bharti, ( sole proprietorship concern of Amit Mittal) guilty of the charges levelled against them. By order dated September 28, 2007 Ganpati and its Directors and M/s Ansh Bharti, among others, were restrained from accessing the securities market for a period of three years and were prohibited for buying selling and dealing in securities in any manner whatsoever. Hence these appeals. It may be mentioned that the Board had issued a separate show cause notice to Madaan for his role in the entire episode and after obtaining a reply from him, his case too has been discussed in the impugned order.
We have heard the learned counsel for the parties at length. As already observed the two charges levelled against Ganpati and its Directors are that it acted as an un registered sub broker and that it circumvented the ex parte restraint order issued by the Board on October 05, 2005. In Appeal no. 4 of 2008 the charge against Amit Mittal, proprietor of M/s. Ansh Bharti is that he aided and abetted Ganpati in circumventing the interim order dated October 05, 2005. The question that arises for our consideration in these appeals is whether these charges stand established. We shall deal with the first charge levelled against Ganpati. The fact that it executed a franchisee agreement on September 19, 2002 with SMC is not in dispute. This agreement provides that Ganpati is desirous of becoming an affiliate of SMC with the object of allowing its clients to deal 4 through SMC in the primary and secondary markets. The agreement further provides that Ganpati is affiliated to SMC and the former shall within the scope of the authority given under the agreement be entitled to act as an intermediary between SMC and the clients for assisting them in dealing in the primary and secondary markets. It is further provided in the agreement that Ganpati shall conduct the business on behalf of its clients with SMC and that the business would be carried on at 37-K Block. Sriganganagar (Rajasthan). A reading of this agreement leaves no room for doubt and it is also the admitted case of the appellant that Ganpati was a franchisee of SMC which is a registered stock broker. It is obvious that Ganpati was to be an intermediary between the clients and the broker and that role has been described in the agreement as that of a franchisee. A franchisee means an agent of the broker and that franchisee is not a term recognized by section 12 of the Act. In another words, franchisee by itself may not be an intermediary of the market but nevertheless it is an agent of the broker and is required to do all such acts under the agreement as are required to be done by a sub broker. As an agent of the broker, Ganpati can only be a sub broker. In view of this agreement we have no hesitation in holding that Ganpati on its own showing is an agent/sub broker of SMC and since it had not been registered with the Board under section 12 of the Act, it could not act and conduct business as a sub broker. Having done so, it violated the provisions of law. The first charge levelled against Ganpati and its Director's stands established. What is contended by the learned counsel for the appellant is that notwithstanding the aforesaid agreement, Ganpati did not execute any trades at Sriganganagar and therefore, the agreement was only on paper which was never given effect to. He was emphatic in his submission that the Board in the impugned order has not referred to even a single trade which was executed through the broker where Ganpati acted as a sub broker. We are unable to accept this contention. Mr. Devender Mittal a Director of Ganpati appeared before the investigating officer during the course of investigations and made a statement on February 28, 2006 wherein he admitted that Madaan was trading from Abohar using the client code of Ganpati. He also admitted that Madaan had requested him to temporarily provide his code details so that trading could start from Abohar. If Ganpati knew that Madaan was trading from Abohar using its code and that code had been provided to Madaan on his request, it is clear that Ganpati must be held responsible for 5 the trades that were executed from Abohar or from wherever in which its client code had been used. It was for Ganpati to explain as to what role did it play in those transactions. When it is admitted that Madaan executed trades using Ganpati's client code, it is obvious that Ganpati played a role of a sub broker. The admission made by Devender Mittal also establishes the fact that Ganpati acted as a sub broker and in the absence of any registration with the Board, the provisions of the Act stood violated.
This brings us to the second charge levelled against Ganpati. As already observed Ganpati and its Directors are alleged to have circumvented the prohibitory order issued by the Board on October 05, 2005. Did it really circumvent the order is the question to be examined. It is the admitted case of the parties before us that the ex parte order dated October 05, 2005 was served on SMC on October 06, 2005 and Ganpati being its franchisee must be deemed to have been served on that date. This apart, it is the appellant's own case that the said order was served on it on October 8, 2005. It is also not in dispute that on October 6, 2005, that is, the very next day after the ex parte order was passed, Amit Mittal the younger brother of Devender Mittal executed an agreement with SMC and became its franchisee. Amit Mittal also appeared before the investigating officer and stated that he became a franchisee after consulting his elder brother Shri Devender Mittal who is a Director of Ganpati. It is, thus, clear that immediately when Ganpati was restrained from accessing the capital market he put up Amit Mittal as the franchisee to continue with the same business of sub broking. We are, therefore, satisfied that Devender Mittal and Amit Mittal in consultation with each other circumvented the order by getting a franchise agreement executed between SMC and Ansh Bharti a proprietorship concern of Amit Mittal. Not only is the charge established against Ganpati for having circumvented the order, the charge against Ansh Bharti that it aided and abetted Ganpati in circumventing that order also stands established. It is pertinent to mention here that the charge against M/s. Ansh Bharti is that it aided and abetted Ganpati in circumventing the order and the penalty has been imposed on it for doing so and it is against this penalty that Appeal no. 4 of 2008 has been filed. In the result, it has to be held that the charges levelled against the appellants stand established.
The learned counsel for the appellant strenuously urged before us that the charges established are not that serious as the charges established against Madaan who had 6 defrauded the investors and had absconded with their money and shares and therefore, the appellant should have been given a lesser dose of penalty. We are in agreement with the learned counsel for the appellant. The charges levelled against Ganpati are only that it acted as un registered sub broker and had circumvented the interim order passed by the Board. The charge established against Madaan whose case has also been dealt with in the impugned order was that he had defrauded the investors. There is a vast difference in the gravity of the charges established against the appellants on the one hand and Madaan on the other. They should not have been painted with the same brush. The ends of justice would have been adequately met if the appellant before us had been debarred from accessing capital market for a period of six months only. Since the operation of impugned order had not been stayed when the appeals were admitted, the appellants have already undergone the punishment for almost two years and six months out of a period of three years. We cannot put the clock back. While upholding the findings recorded by the Board and reducing the period of penalty to six months in the case of Ganpati and Amit Mittal, the appeals stand disposed of. Since M/s Ansh Bharti had not been restrained by the ex parte order dated October 05, 2005, the period of six months in its case shall commence from the date of the impugned order.
There is no order as to costs.
Justice N.K.Sodhi Presiding Officer Arun Bhargava Member Utpal Bhattacharya Member 19.03.2008 sl