Securities Appellate Tribunal
Ajmera Associates Pvt. Ltd. (Now Known ... vs Sebi on 13 December, 2010
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 190 of 2010
Date of decision: 13.12.2010
Ajmera Associates Pvt. Ltd.
(now known as Ajmera Associates Ltd.)
63/67, Carmello Building, 4th floor,
Pathakwadi, L.T.Marg,
Mumbai - 400 002. ...... Appellant
Versus
The Securities and Exchange Board of India
SEBI Bhavan, Plot No. C4-A, "G" Block,
Bandra Kurla Complex, Bandra (East),
Mumbai - 400 051. ...... Respondent
Mr. J. J. Bhatt, Advocate for the Appellant.
Dr. (Mrs.) Poornima Advani, Advocate with Mr. Ajay Khaire and Ms. Amrita Joshi, Advocates for the Respondent.
CORAM : Justice N.K. Sodhi, Presiding Officer
Samary Ray, Member
P. K. Malhotra, Member
Per : Justice N.K. Sodhi, Presiding Officer (Oral)
Challenge in this appeal is to the order dated September 13, 2010 passed by the adjudicating officer imposing a monetary penalty of Rs.1 lac on the appellant for having executed circular trades on behalf of its client. It has been found that the appellant which is a registered stock broker while executing the trades had indulged in fraudulent and unfair trade practices and violated Regulation 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 read with Regulation 4 of the Securities and 2 Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. The appellant has also been held guilty of violating the code of conduct prescribed for the stock brokers.
2. On the conclusion of the investigations, a show cause notice dated August 10, 2007 was issued to the appellant and five others alleging that they had violated the aforesaid provisions by executing circular trades on behalf of their clients in the scrip of Rajesh Exports Limited (for short the company). The details of the trades executed by the appellant on behalf of its client Sunil Purohit had been furnished along with the show cause notice. The appellant filed its reply denying all the allegations. The stand taken by the appellant has been noticed by the adjudicating officer in para 11 of the impugned order. The appellant pleaded that as a stock broker, it had only executed the orders received from Sunil Purohit on telephone and that it was not aware of the counter party broker or even the counter party and that it had not violated any of the provisions referred to in the show cause notice. On a consideration of the material collected during the course of the investigations and the enquiry, the adjudicating officer concluded that the appellant along with others had executed circular trades and had indulged in fraudulent and unfair trade practices making itself liable for penalty under Section 15HA of the Securities and Exchange Board of India Act, 1992. As already noticed, he imposed a monetary penalty of Rs.1 lac on the appellant. Hence this appeal.
3. We have heard the learned counsel for the parties and the only question that we need to answer is whether the appellant had knowledge at the time of executing the trades that those were circular in nature and that it was a part of the whole chain. It is not in dispute that the trading system that we have on the stock exchanges is a blind trading system which maintains complete anonymity of the persons trading. The broker while executing an order (buy or sell) cannot possibly know at the time of placing the order through the system as to who the counter party is or even the counter party broker. In other words, the trading system does not permit the buyers and the sellers to have any 3 interaction between them except through the trading system. A buy order placed on the system matches with a sell order and a trade comes to be executed and this matching is done by the system on a price time priority basis. Despite the anonymity of the system, we have seen market players and the intermediaries like the brokers executing manipulative trades by defeating the system and this is usually done by placing the buy and sell orders simultaneously for the same amount and at the same price. Such matching orders usually result in trades in comparatively less liquid scrips. This being the system, it sometimes becomes difficult to find out whether the brokers who execute the trades of their clients and who are expected to carry out their directions are also a party to the mischief. If the broker knew at the time of executing the trade what the client was upto, then obviously he is a party to the mischief. Since the trading system maintains complete anonymity, brokers always plead that they were ignorant about the counter party or his broker. In such a situation one has to look to the trading pattern and if the trades match too often or if the matching of the trades is noticed day after day and trade after trade, one can infer that the matching was done not by the system but by manipulating the same. Similarly, if two or more market players start trading in circles and do not allow the shares to go out of the circle, it could be reasonably inferred that both traders and their brokers are colluding to execute such artificial trades which give a misleading appearance of trading in the market without change of beneficial ownership in the traded scrip. Such an inference can be drawn more readily when the circle consists of a larger group of entities. In the absence of prior meeting of minds and knowing the mechanism of the trading system, matching and circular trades as aforesaid cannot be too frequent an occurrence and can only lead one to conclude that the trades had been manipulated by misusing the system. Whether a broker was aware that the client was trying to match the orders or execute circular trades can be judged only through their trading pattern as we do not have direct evidence in such cases. The intention of the parties and the brokers will have to be gathered from the surrounding circumstances looking at the trading pattern, the frequency of trades, their volumes and such other circumstances as may be relevant for such determination. In the instant case, 4 we have examined the trading pattern not only of the appellant but also of the other brokers who have been found by the adjudicating officer to have executed circular trades in the scrip of the company. The circular trades executed by the appellant and five others on June 6, 2006 can be pictorially described as under:
(1) 850 (2) 850 (3) Clg. No. 275 Clg. No. 519 Clg. No. 911 (6) 850 (5) 850 (4) Clg. No. 13 Clg. No. 151 Clg. No. 737
It is clear from the aforesaid chart that 850 shares of the scrip were sold by the broker with code no. 275 to another with code no. 519 who then sold to the appellant whose code number is 911. The appellant then sold these shares to another broker with code no. 737 and through two other brokers with code nos. 151 and 13, the shares came back to the broker who started the chain. Such circular trades have been executed by these brokers among themselves during three months from June 2003 to August 2003 and we find that there are 55 such circles during the 64 days of trading during these three months. The trades executed by all these brokers clearly depict a pattern and the chain gets completed when the shares reach back to the broker who started the selling. What is contended by the learned counsel for the appellant before us is that his client executed one or two trades during each trading day and that the appellant did not know who the other brokers were. It is true that the appellant's trades are a few during the course of the day but what is interesting to note is that when the appellant executed the trades on behalf of Sunil Purohit, the other six or seven brokers also bought and sold the same quantity of shares and executed the trades at the same time with no time gap between each leg of the chain. Such large number of circles in the execution of trades cannot be a matter of coincidence and that too, among a large number of brokers without the 5 knowledge of the broker. Of course, each broker is taking shelter under the anonymity of the system but the trading pattern does disclose their intention and the balance of probabilities clearly tilt against the trading brokers including the appellant. In this view of the matter, we cannot but uphold the impugned order.
4. The learned counsel for the appellant brought to our notice the observations made by the adjudicating officer in para 32 of the impugned order wherein he finds that there was no nexus between the appellant and its client other than a broker-client relationship and that the appellant had no nexus even with the counter party brokers or with the counter parties. These observations, in the circumstances of this case, only mean that there was no direct evidence to establish that they were all acting in concert with each other. We have noticed the trading pattern which clearly shows that they were trading in a manipulative manner by executing circular trades to ensure that the traded shares remain within the circle. Such trades are artificial and non-genuine as they do not transfer the beneficial ownership in the traded shares and are meant only to increase the volumes artificially.
5. No other point has been raised.
In the result, the appeal fails and the same stands dismissed with no order as to costs.
Sd/-
Justice N. K. Sodhi Presiding Officer Sd/-
Samar Ray Member Sd/-
P. K. Malhotra Member 13.12.2010 Prepared and compared by-ddg