Securities Appellate Tribunal
Kasat Securities Private Ltd. vs Securities And Exchange Board Of India on 20 June, 2006
JUDGMENT
N.K. Sodhi, J. (Presiding Officer)
1. This order will dispose of two appeals nos. 27 and 28 of 2006 in which common questions of law and fact arise. Since the arguments were addressed in the appeal no. 27 of 2006 the facts are being taken from this case. Learned Counsel for the parties are agreed that the order in appeal no. 27 of 2006 will govern the other case as well.
2. This appeal filed under Section 15T of the Securities and Exchange Board of India Act, 1992 (for short "the Act") is directed against the order dated January 25, 2006 passed by the wholetime member of the Securities and Exchange Board of India (hereinafter called the "Board") suspending the certificate of registration of the appellant as a broker for a period of four months on the ground that it had aided and abetted Kosha Investments Limited and one Shri. Sourabh Bora (hereinafter referred to as 'KIL' and 'Bora' respectively) in manipulating the price of the shares of Snowcem India Limited (hereinafter called the "company"). It was also held that the appellant had failed to exercise due skill and care in this regard and that it had failed to collect margins from its clients while trading on their behalf and thereby violated the circulars issued by the Board. The facts giving rise to this appeal lie in a narrow compass and these may first be stated.
3. National Stock Exchange conducted an internal investigation in the scrip of the company and submitted its report to the Board wherein it had found that there was major spurt in the total traded volume in the shares of the company during the period from January, 1999 to August, 1999. On receipt of this report the Board ordered detailed investigations into the dealings in the scrip of the company. These investigations revealed that KIL and Bora were two predominant traders in the scrip of the company during the period of investigations and that they traded through the appellant as a broker. The investigations further revealed that KIL was trading with the money received by it from the company which in turn was given to Bora to purchase the forfeited shares from the company. KIL is also alleged to have paid all its brokers through whom it had traded in the shares. The investigating officer also found that KIL and Bora who traded through the appellant as a broker had manipulated the price of the scrip of the company and they had indulged in fictitious/ circular trading in large quantities and that the transactions quite often matched on the screen of the exchange even though the scrip of the company was illiquid. On receipt of the report from the investigating officer the Board issued a notice to the appellant to show cause why action be not taken against it for having violated Regulation 4(a), (b) and (d) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. The appellant was also called upon to show cause why action be not taken against it for having violated the code of conduct as specified in Schedule II read with Regulation 7 of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992. It was alleged in the show cause notice that the appellant along with its group companies had indulged in manipulative and fraudulent transactions along with KIL and Bora and had not exercised due skill and care while executing the transactions. The appellant filed its reply to the show cause notice denying all the allegations. The enquiry officer after holding an enquiry and affording an opportunity of hearing to the appellant submitted his report to the Board recommending that the certificate of registration of the appellant to be suspended on the ground that it had aided and abetted KIL and Bora in executing the manipulative and fraudulent transactions and that it had failed to exercise due skill and care in this regard. On receipt of the enquiry report the Board issued another show cause notice calling upon the appellant to show cause why action as recommended by the enquiry officer be not taken against it. A copy of the enquiry report was sent along with the show cause notice. In this notice the appellant was also called upon to show cause notice why action be not taken against it for not having collected margins from its clients while trading on their behalf. According to the Board non collection of the margin money was in violation of the mandatory directions issued by it through circulars dated November 18, 1993 to December 11, 1998. A detailed reply to the show cause notice was filed by the appellant denying the allegations. It emphatically denied the allegations that it had aided and abetted KIL and Bora in executing manipulative and fraudulent transactions. The stand taken by the appellant was that it acted as a broker for purchasing shares on behalf of these clients and that it was not aware whether the clients were indulging in circular or fictitious transactions. As regards the allegations regarding non-collection of margins, the appellant pleaded that while selling the scrips on behalf of its clients it had received in advance the securities to be sold with valid transfer documents and therefore it did not feel the necessity of collecting the margins. Reference was made to the circulars issued by the Board in this regard.
4. On a consideration of the reply filed by the appellant and the material collected by the enquiry officer the Board came to the conclusion that the appellant had entered into transactions for big quantities of shares for its clients and it was not possible for such quantities to match time and again on the screen of the exchange and therefore the transactions were synchronized/ structured in nature. The Board also found that the scrip of the company was illiquid and therefore the appellant as a broker failed to exercise due skill and care and diligence while executing the transactions thereby violating the provisions of the code of conduct specified in the prescribed code. The Board also found that the appellant traded heavily on behalf of its two clients, namely, KIL and Bora and that it also traded on its own behalf and since the transactions were structured with a view to rig the market the appellant as a broker must have known that the transactions were fictitious and manipulative and therefore it aided and abetted the two clients in executing the transactions. The Board also found that the appellant had failed to collect the margins while selling the scrips of the company on behalf of KIL and Bora and as such violated the circulars issued by the Board in this regard. In view of these findings the Board accepted the recommendations given by the enquiry officer and by its order dated 25/01/2006 ordered suspension of certificate of registration of the appellant for a period of four months. Hence this appeal.
5. We have heard the learned Counsel for the parties and are of the view that the impugned order cannot be sustained. As already noticed, the appellant had been charged with two irregularities/ illegalities: (i) that it aided and abetted KIL and Bora in executing the manipulative and fraudulent transactions and thereby failed to exercise due skill and care; and (ii) it failed to collect margins from its clients when it traded on their behalf. We will deal with the second allegation first.
6. The Board by its circular dated November 18, 1993 had issued directions to all the intermediaries of the stock markets in the country through all the stock exchanges regarding regulation of transactions between clients and brokers. Clauses 4 and 5 of this circular which provide for the collection of margins by the brokers read as under:
4. Member Brokers shall buy securities on behalf of client only on receipt of margin of minimum 20 percent on the price of the securities proposed to be purchased, unless the client already has an equivalent credit with the broker. Member may not, if they so desire, collect such a margin from Financial Institutions, Mutual Funds and FII's.
5. Member brokers shall sell securities on behalf of client only on receipt of a minimum margin of 20 percent on the price of securities proposed to be sold, unless the member has received the securities to be sold with valid transfer documents to his satisfaction prior to such sale. Member may not, if they so desire, collect such a margin from Financial Institutions, Mutual Funds and FII's.
Therefore, on December 11, 1998 the Board issued yet another circular dealing with margins and the relevant paragraph of this circular is reproduced hereunder for facility of reference:
It shall be mandatory for member-brokers to collect margins from clients in all cases where the margin in respect of the client in the settlement, would work out to be more than Rs.50,000/-. The margin so collected shall be kept separately in the client bank account and utilized for making payment to the clearing house for margin and settlement with respect to that client.
7. A conjoint reading of the aforesaid clauses of the two circulars would make it clear that brokers who buy securities on behalf of their clients should collect margin money of a minimum 20% of the price of the securities proposed to be purchased unless the client already has an equivalent credit with the broker. While selling securities on behalf of their clients the brokers are also required to collect margins of 20% on the price of the securities proposed to be sold unless the member broker has received the securities to be sold with valid transfer documents to his satisfaction prior to such sale. In other words, where a broker has received the shares in advance with all valid transfer documents for sale he is not required to collect the margin money. The purpose of collecting margins from the clients is primarily to minimize the risk of default and to secure the settlement mechanism of the market in this regard. It is therefore, logical for the Board to provide in the circular that if the entire shares which are to be sold are received by the broker along with valid transfer documents then the margin money need not be collected as there would be no risk in the execution of the transactions. Similarly, in the case of shares being brought by a broker he need not collect the margin if he already has with him a credit for an amount equal to the margin money lying on behalf of his client. This circular obviously created some difficulties for the brokers where the transactions were for a small value. The Board then issued a circular in 1998 requiring the brokers to collect margins from clients where the margin would work out to be more than Rs.50,000/-. This would mean that where the margin money was less than Rs.50,000/- it was not required to be collected. In the case before us the explanation furnished by the appellant that it had received all the shares in advance before they were sold on behalf of the clients along with valid transfer documents has not been controverted in the impugned order and if the appellant had received the securities in advance, surely it was not required to collect the margin money. In this view of the matter the finding recorded by the Board holding the appellant guilty on this count cannot be upheld.
8. This brings us to the main allegation leveled against the appellant. As found by the Board, the appellant had aided and abetted KIL and Bora in executing manipulative and fraudulent transactions and as a broker it did not exercise due skill and care. The so called fictitious/ structured deals executed by the clients through the appellant as a broker have been referred to in detail in the show cause notice dated October 3, 2003. The relevant chart relied upon by the Board is reproduced hereunder for facility of reference.
Order date Order Time Order No. B/S TM Name Client Total Vol.
Price Trade No. 19990701 10:02:40 199907010007920 S Kasat KIL 25000 52 5538 19990701 10:06:45 199907010020801 B Indraprastha KIL 25000 52 5538 19990701 10:08:58 199907010027353 S Kasat KIL 25000 52 9430 19990701 10:10:19 199907010031406 B Indraprastha KIL 25000 52 9430 19990714 11:54:28 1999070140292012 S Kasat KIL 25000 59 170526 19990714 11:55:57 199907140294821 B Indraprastha KIL 25000 59 170526 19990714 11:56:43 199907140296410 S Kasat KIL 25000 59.3 172001 19990714 11:57:06 199907140297184 B Indraprastha KIL 25000 59.3 172001 199990707 14:10:43 1999907070445477 S Kasat KIL 25000 64.8 270605 199990707 14:11:06 1999907070445850 B Triveni KIL 25000 64.8 270605 199990707 14:11:33 1999907070446281 S Kasat KIL 10000 64.9 271872 199990707 14:13:08 1999907070447775 B Triveni KIL 5000 65.3 271872 199990707 14:13:07 1999907070447755 S Kasat KIL 5000 65.3 271879 199990707 14:13:07 1999907070447755 S Kasat KIL 5000 65.3 271879 199990707 14:14:13 1999907070448823 B Triveni KIL 2500 65.3 272749
9. When we look at the aforesaid transactions it is clear that on 01/07/1999 a sell order was placed through the appellant at 10:02:40 hours. The name of the client is KIL on whose behalf the appellant had placed the order. Barely four minutes thereafter a buy order is also fed into the computer on behalf of the same client i.e., KIL through another broker Indraprastha. The buy and sell orders are for the same quantity and for the same price and they match. Similarly, in the other transactions though there is some time gap, the buyer and seller are KIL. It was strenuously urged by the learned Counsel for the appellant that these deals could not be termed as fictitious or synchronized because the buy and sell orders were not placed simultaneously. That may be so but if the share was illiquid as has been pointed out to us by the learned Counsel appearing for the Board then the sell order could well have matched after a gap of four minutes or even longer and the trade could still be described as synchronized or structured. Be that as it may, the buyer and seller are the same. We do not think that the same shares could be bought and sold by the same person. The trades, on the face of it, appear to be fictitious and we shall proceed on that assumption. It is obvious that these trades were executed by the clients and the appellant acted only as a broker. If the appellant knew that the trades were fictitious then there would be no hesitation in upholding the finding of the Board that it aided and abetted the parties to execute fraudulent transactions. Having heard the learned Counsel for the parties and after going through the record we were satisfied that this link is missing. There is no material on record to show that the appellant as a broker knew that the trades were fictitious or that the buyer and the seller were the same persons. Trading was through the exchange mechanism and was online where the code number of the broker alone is known and the learned Counsel for the parties are agreed that it is not possible for anyone to ascertain from the screen as to who the clients were. This is really a unique feature of the stock exchange where, unlike other moveable properties, securities are bought and sold between the unknowns through the exchange mechanism without the buyer or seller ever getting to meet. Therefore, it was not possible for the broker to know who the parties were. Merely because the appellant acted as a broker cannot lead us to the conclusion that it must have known about the nature of the transaction. There has to be some other material on the record to prove this fact. The Board could have examined someone from KIL to find out whether the appellant knew about the nature of the transactions but it did not do so. As a broker, the appellant would welcome any person who comes to buy or sell shares. The Board in the impugned order while drawing an inference that the appellant must have known about the nature of the transactions has observed that the appellant failed to enquire from its clients as to why they were wanting to sell the securities. We do not think that any broker would ask such a question from its clients when he is getting business nor is such a question relevant unless, of course, he suspects some wrong doing for which there has to be some material on the record. The learned Counsel appearing for the Board strenuously urged that the appellant as a broker was not an unknown person to the clients and that there was a clique amongst the clients, the appellant and one Rajesh Kasat who is the managing director of the appellant and some other companies who were trading in the scrips of the company in a manipulative manner. He referred to Ex. 'C; on the record to substantiate his plea. This is a document sent by the appellant to the Board giving details of the clients on whose behalf it had traded. As per the directions of the Board the appellant had furnished this information regarding the details of the clients. Merely because the appellant traded on behalf of several clients in the scrip of the company would again not lead us to the conclusion that the appellant knew about the nature of the transactions executed by KIL and Bora. We may tend to agree with the learned Counsel for the Board that the appellant was known to the clients on whose behalf it had traded but that again does not fill up the gap. We have perused the impugned order and find that the Board has jumped to the conclusion that, merely because the appellant acted as a broker on behalf of its clients it ought to have known the nature of the transactions executed by them. We have already observed that this conclusion is rather far fetched and we are unable to concur with the same. In this view of the matter we cannot uphold the findings recorded by the Board in regard to the first allegation made against the appellant.
10. In appeal no. 28 of 2006 there is an additional ground on which the certificate of registration of the appellant has been suspended. It is alleged that the client introduction form produced by the appellant was dated November 1999 whereas the client started trading with it in June 1999. The allegation is that the appellant traded on behalf of the client without an agreement. This allegation formed part of the show cause notice. The reply of the appellant is that through inadvertence the date had been wrongly entered at the time of filing the registration form and that when the mistake was noticed the same has since been rectified. It is not in dispute that the mistake has been rectified. The Board did not accept the explanation. If it had given some reasons for not accepting the explanation we could have considered that aspect. The Board in the impugned order has simply rejected the contention without giving any reason. The possibility of advertence cannot be ruled out and therefore, we would like to give the appellant a benefit of doubt in this regard.
11. In the result of appeals are allowed and the impugned orders dated 25/01/2006 set aside with no order as to costs.