Securities Appellate Tribunal
Shyam Sundar Dalmia vs Securities And Exchange Board Of India on 10 September, 2004
Equivalent citations: [2004]55SCL427(SAT)
JUDGMENT
1. The Appeal is taken up for final disposal with the consent of the parties.
2. The Appellant was a member with the Calcutta Stock Exchange and is a sub-broker registered with SEBI.
3. The Appellant being aggrieved by the order of SEBI (hereinafter referred to as 'Respondent') dated 5th December, 2003 has preferred this appeal.
4. The Respondent, by its impugned order dated 5th December, 2003, suspended the certificate of registration of the brokers for a period of 3 months. The order was to come into force after 21 days from the date of the order.
5. The facts of the case as alleged by the Respondent are briefly as follows:-
An inspection of the books of accounts and other records of the Appellant was carried out by SEBI during the month of November, 2001. The inspection related to the period Financial Years 2000-2001 and 2001-2002 (up to September 30, 2001). In the course of inspection, the following irregularities / deficiencies were noticed:
a) Order book was not maintained by the said broker.
b) Margin deposit book was not maintained by the said broker.
c) Client-Member Agreement forms and client registration forms wee not properly maintained.
d) The said broker had entered into transactions with two stock brokers - Dalmia Securities Ltd. member NSE and Nangalia Stock Broking Pvt. Ltd. member, BSE. The latter entities were not registered with SEBI as sub brokers and hence the said broker has dealt with unregistered sub brokers.
e) The said broker had failed to collect upfront margin from clients.
f) The said broker had entered into transactions with other members of the Exchange and settled trades with them outside the Exchange mechanism.
g) The said broker had entered into matching transactions."
6. Out of the seven charges, the Respondent found that three charges were not sustainable and ultimately found the Appellant in violation of Broker Regulations in relation to the following charges:-
"a) Non-maintenance of the time of placement orders in the order book;
b) Non-maintenance of margin deposit book in a physical form;
c) Client registration forms not being properly filled up in relation to certain particulars;
d) The execution of two transactions which in the view of the Respondent appear to be synchronized transactions."
7. The Respondent also came to the conclusion that the charges levelled against the Appellant are not serious enough to impose a major penalty. The Respondent, in the impugned order, held as follows:-
" I find that the said broker has not only failed to maintain records and books as required of him under the Broker Regulations, but he has also indulged in manipulative practices in the capital market. It is necessary in the interest of the investors and in order to ensure proper regulation of the said broker as an intermediary that the certificate of registration granted to him be suspended. The enquiry officer has recommended that the suspension may be for a period of 1 year in view of the observation that the said broker has indulged in acts that were detrimental to the smooth functioning of the market. In this regard, I find that although the said member has acted in violation of the regulations these violations are not sufficient for imposition of major penalty such as suspension of registration of one year. Moreover, three of the alleged violation have not been established. In view of the same, I am of the considered opinion that a penalty of suspension of registration for 3 months would suffice in the circumstances."
(Italic by Tribunal)
8. None of the charges, in our view, are serious enough except one to warrant a penalty of suspension since, admittedly, even according to the Respondent, the charges were of minor nature.
9. The only charge that requires our attention is a serious charge. The charge is whether the broker had entered into matching transaction. This is what the Respondent has stated with respect to the charge of matched transaction.
"It is noted that the enquiry officer has examined two transactions by the said broker with Mehta & Ajmera to arrive at a conclusion that the said broker had indulged in the synchronized trading. In his reply and written submissions, the said broker has submitted that for a charge of synchronized trading/ matched transactions to sustain, it must be shown that the quantities and the price should be similar. The trades in the scrip of Zee Tele that have been noted by the enquiry officer involved both sell and buy transactions. As observed in the inspection report, these transactions are as under:
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Member Trade Date Trade Time Trade No. Order no. Buy/Sell Qty. Price Counter Code Party Code
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D0150 23.11.2000 10:46:08 1765622 931219464 S 80010 278.7 D0281 D0510 23.11.2000 10:46:08 1765623 931219464 S 80010 278.7 D0281 D0510 23.11.2000 10:46:08 1765624 931219464 S 80010 278.7 D0281 D0510 23.11.2000 10:46:08 1765625 931219464 S 80010 278.7 D0281 D0510 24.11.2000 12:50:45 1774213 990966551 B 75005 282.7 D0281 D0510 24.11.2000 12:50:45 1774214 990966551 B 75005 282.7 D0281
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I note that 4 transactions on 23.11.2000 and two transactions on 24.11.2000, by the said broker having the same order No., the same quantity of shares and the same price were matched with Mehta & Ajmera. The enquiry officer has observed that such transactions which were put together C-star trading system of the CSE were not possible unless the price, quantity and time were pre determined by the two brokers. I find from the above that the said broker has indeed indulged in matched transactions/ synchronized trading with Mehta & Ajmera."
10. A close perusal of the transactions in the chart indicates that the Appellant, who was both a broker as well as a trader, had sold a large quantity of scrips on 23.11.2000 at Rs.278.7 per share. On 24.11.2000 a lesser quantity of scrip was purchased at Rs.282.7 per share. Although it cannot be ruled out that the quantity of sale is almost near to the quantity purchase, but it cannot be forgotten that the Appellant by these two transactions has lost lakhs of rupees.
11. In fact, the Enquiry Officer has clearly given the finding that there were no synchronizing transactions on the part of the Appellant. It was therefore submitted that a single sale order of 80,010 shares was executed by the Appellant in the scrip of Zee Tele, which translated into four executed transactions on the screen-based trading system. So also, a single buy order of 75,005 shares with Zee Tele resulted in the execution of two trades. It will be seen from the statement that there was no material to draw an inference of an artificially matched trade. In fact, the shares sold by the Appellant were 80,010 in number while the purchase was 75,005 shares in number. This was not the case as evident from the material on record. All the transactions culminated from the placement of orders on the trading system in the ordinary course of business which got matched with contra orders placed by other brokers in the trading system. The trades were not matched in the system, it cannot be alleged that they amount to synchronized trades. In fact, for any trade if it is treated as synchronised trade, it is compulsory that two trades must match. From the facts and circumstances of this case, it is obvious that there was only two transactions and not six, as shown in the impugned order. The two transactions are (1) 23.11.2000 sale of 80,010 shares and (2) 24.11.2000 purchase of 75,005 shares. The sale transaction was on 23.11.2000 and the buy transaction was on 24.11.2000. In the bargain, the appellant had lost several lakhs of rupees since he sold 80,010 shares on 23.11.2000 at Rs.278.7 and on the next day bought 75,005 shares at Rs.282.7 per share, as the chart indicates. Apart from anything else, the Enquiry Officer himself says that there was no synchronized trade, which enabled the scrip to fluctuate artificially to the disadvantage of the investors. When the Enquiry Officer himself finds that there is no synchronized trade, it cannot be said that the allegation is fully proved, although with respect to the other allegations a penalty of three months' suspension will destroy the appellant.
12. Mr. Somashekar, the learned counsel for the appelant, placed reliance on the judgement of this Tribunal in Triumph International Finance Ltd. dated 24.8.2001 in Appeal No.35 of 2001 where the Tribunal held that investigation must reveal the manipulative role of the individual and must further prove that there was intention to adversely affect the stock market trade for specific period. Reliance was also placed on the judgement of the Tribunal in appeal No.95/2003 dated 23.8.04 in Chona Financial Services Pvt. Ltd. wherein this Tribunal has set out extensively the case where SEBI has given a warning rather than suspension for similar acts of irregularities.
13. We would like to quote a little more of the judgement at para 7 from the case where warning has been given to the aggrieved party:
"The appellant submitted a few cases namely M/s. Bakliwala Investment, J.M. Mrgan Stanley Retail Services Pvt. Ltd., Bama Securities as under, which have been found to contain by and large similar irregulariries and have been only served with a letter of warning by SEBI.
A) MS. Bakliwala Investment Irregulariries Provision for Tax for the interim period from April 1 to September 30, 2000 not made.
Confirmations have not been obtained from Banks, Creditors and debtors by the broker.
Brother had not time stamped the order slip/records Contract notes not serially numbered except for computer generated numbers on day-to-day basis which have no control.
Contract notes not issued within the specified time.
Consolidated stamp duty not paid.
Client Registration forms were not completed Order book was not maintained.
Delay in payment of funds.
Delay in delivery of securities One client account being adjusted against another client without any authorization Transactions with associate firms/companies separate set of ledger accounts as clients and others not maintained.
Compliant register not maintained.
Client account were used for other purposes Margin money not collected In 10 cases, deals were done outside the NEAT System Order Irregularities are basically technical lapses and do not deserve a substantive punishment.
Minor Penalty - Warning
b) M/s. J.M. Morgan Stanley Retail Services Pvt. Ltd.
Irregularities Failure to obtain client registration forms and agreement Failed to maintain separate client account.
Order Warning
c) M/s. Bama Securities Irregularities Contract notes were missing Acknowledgement from the clients not obtained Not maintaining client registration forms Order Warning"
There is another mitigating factor in this case that the Appellant is 72 years old and had unblemished record. The Appellant has filed an affidavit setting out the mitigating circumstances. The affidavit dated 30 August, 2004 reads as follows:-
"I Sumit Binani, authorised representative of the Appellant above named do hereby solemnly affirm as follows:-
2. I say that the Appellant is aged 72 and has led his entire working life and career in the stock broking business and commands the highest standards of integrity goodwill and repute. I say that even after an erroneous notification of the Appellant on 20th November 2001, by the Custodian attached to the Special Court hearing matters relating to securities transactions conducted in1992, the Appellant is the only person who has been de-notified after the Appellant subjected himself and his entire operations to a rigorous and thorough audit of examination by a special auditor appointed by a special court. I say that the impugned order cast the severe set back and a blot on the stellar track record of the Appellant and would cause him grave harm, besmirching his spotless track record assiduously built up till date.
3. I say that despite the Appellant having been duly cleansed of any allegation relating to the above referred notification by the Custodian, the fact of the notification had led to the Appellant suffering in his business, with financial institutions ceasing to deal with the Appellant. The Impugned Order, in a similar manner, would lead to a further severe adverse impact on the business operations of the Appellant. I say that merely because the Appellants business volumes may have shrunk inter alia due to the aforesaid reasons the Appellant case in the captioned appeal cannot be said to have been jeopardized, as was argued by the Counsel for the Respondent.
4. I say that although the business is less active currently, due to the reasons explained above, a suspension of registration resulting in the Appellant having to shut shop for any period, howsoever small, would result in a debilitating impact not only for the Appellants clients but also for various temporary and permanent employees whose services are involved in the conduct of the Appellant operations.
5. I say that the Respondent has notified the SEBI (Criteria For Fit and Proper Person) Regulation 2004 ("Fit and Proper Regulations") on March 10, 2004. The Fit and Proper Regulations interalia provide that for the purposes of determining as to whether any applicant or intermediary seeking registration with SEBI is fit, and proper, Respondent may take account of any consideration including without limitation the criteria set out in Regulation 3(1) of the said Regulations. Regulation 3(2) of the said Regulation provides that a person shall not be considered as a fit and proper person for the grant or renewal of certificate of registration or for continuing to act as an intermediary if any of the disqualifications set out in the said Regulation takes effect. Regulation 3(2)(a) provides that if the intermediary or its whole time director or managing partner is convicted by any court for an offence involving securities law, such person shall be unfit and improper to be associated with any capital market intermediary. I say that Regulation 3(2)(h) further provides that if the Respondent is of the opinion that an applicant or intermediary is unfit and improper in the capital market such person shall become unfit and improper. I say that the language of the said Fit and Proper Regulation is wide enough to enable the Respondent to utilise its powers contained therein to use the Impugned Order to make the Appellant ineligible for a future capital market activities, which would severely jeopardize the Appellant in respect of the Appellants interest in other capital market intermediaries. The Appellant along with his relatives owns the entire equity of Dalmia Securities Private Limited, which is registered market intermediary as a Depository Participant with the National Securities Depository Limited, Central Depository Services Limited, and is a member of the National Stock Exchange, Calcutta Stock exchange, Mumbai Stock Exchange, and the over the counter exchange of India.
6. I say that each of the SEBI Regulations governing the aforesaid intermediaries have been amended by the said Fit and Proper Regulations, to provide that the provisions of the Fit and Proper Regulations shall mutatis mutandis apply.
7. I say that the only seemingly material charge in the Impugned Order is that relating to a solitary transaction in Zee Telefilms Limited effected on November 23, 2000 and November 24, 2000. The Impugned Order refers to a trade of 80,010 shares on November 23, 2000 and 75,005 shares on November 24, 2000. I say that the two settlements to which the two dates belong, the Appellant's transactions in the shares of Zee Telefilms Limited aggregated to a gross purchase of 9,19,613 shares and a gross sale of 17,04,221 shares respectively. Against such volumes of sale transactions of 80,010 shares and a purchase of 75,005 shares being coincidentally matched by the screen-based trading system cannot be the basis of leveling a serious charge of matched/ synchronized transactions against the Appellant. The transactions in the shares of Zee on these two days assailed in the Impugned Order represents only 8.7% of the purchase and 4.4% of the sales on the Calcutta Stock Exchange. I further state that these transactions referred to in the Impugned Order do not reflect any pattern or trend for an adverse inference of matching or synchronization of trade to be drawn.
8. I further state that the Appellant is non-executive Director on the Board of Director of Tezpore Tea Company, a listed Company.
Sd/-
SUMIT BINANI (Authorised Representative for the Appellant)
14. The learned counsel also relied on the order of SEBI dated 2nd of June 2004 in the matter of J.M. Morgan Stanley Retail Services Pvt. Ltd. The allegations against the broker were:
"2.1.1 The member had committed the following irregulariries with regard to the contract notes issued:
(i) Contract notes were being issued in Form A.
(ii) Contract notes did not bear pre-printed serial numbers. The numbers were generated through computer software.
(iii) Acknowledgements were not obtained on the duplicates of the contract notes. The contract notes of the outstation clients were being sent through courier
(iv) No contract notes were issued for "vyaj badla" transactions.
(v) Duplicate copies of bills issued to clients for vyaj badla transactions were not being maintained.
2.1.2 Proper segregation was not being maintained between member's own account and clients' accounts.
2.1.3 Client registration forms were not available with respect to some clients.
2.1.4 In some instances, there was delay in giving deliveries to the clients."
The SEBI ultimately modified the order of the Enquiry Officer and directed the broker to be more vigilant in future (warning)."
15. We have carefully considered the facts and circumstances of the case. It is admitted that there should be parity in the penalties that are imposed on the appellant as in other cases, otherwise it leads to the charge of discrimination.
16. More than anything else we feel every opportunity should be given to the broker to rehabilitate himself.
17. That is why SEBI (Procedure For Holding Enquiry) Regulation, 2002 has divided the penalty into minor penalty and major penalty. Warning is one of the minor penalty. The regulation itself contemplates such a penalty.
18. We do not think that the Respondent should resort to a more stringent measure since this would destroy the Appellant and bring the Appellant's business to a stand still since the alleged irregularities took place long back in the year 2000 and there appears to be interim order staying the impugned order pending appeal.
19. Undoubtedly the Appellant has had a good track record and deserves a more lenient punishment that meets ends of justice. Accordingly we modify the order of the Respondent and charges of suspension of certificate of registration for a period of 3 months is modified to that of warning to be given to the Appellant.
20. We accordingly direct the respondent to give a warning in terms of Regulation 13(1)(a)(i) in lieu of the period of suspension of three months.
21. The appeal is disposed of accordingly. No order as to costs.