Securities Appellate Tribunal
Bipin R. Vora vs Securities And Exchange Board Of India on 11 April, 2005
Equivalent citations: (2005)6COMPLJ45(SAT), [2005]62SCL704(SAT)
JUDGMENT
Kumar Rajaratnam, J. (Presiding Officer)
1. The appeal is taken up with consent of parties.
2. The appellant who was a broker of the stock exchange, Mumbai and registered with SEBI challenges the order passed by the respondent wherein the appellant's registration of certificate was suspended for a period of three months by an order dated 6.10.2004.
3. The impugned order was to come into force after a period of 3 weeks to enable the appellant to file the statutory appeal.
4. The facts briefly are that the shares of Sawaca Business Machines Ltd. (hereinafter referred to as "the Company") were listed in the BSE and in the Ahmedabad Stock Exchange. The respondent conducted an enquiry with respect to alleged price manipulation in the scrip of the company during the period between October and December 1999. It is seen that the scrip of the company took an unusual upward price movement from Rs. 8/- to Rs. 38/-. The volume of the trade also increased. One Mahendra Shah, who later became managing director of the company, was the largest seller during that period. He had offloaded large quantity of shares in the market. The said Shah also placed large buy orders perhaps with the object of creating a misleading appearance of demand in the shares of the company. The allegation against the appellant was that it dealt with the shares of the company through a sub-broker known as Sai Investment Corporation Pvt. Ltd. The sub-broker in turn, it appears, dealt with Mr. Shah and their entities. The details of the transaction of the sub-brokers are as follows:
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Settlement No. Purchases Sales Gross Net
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33 100 100 -100
35 2900 200 3100 2700
36 2600 2500 5100 100
37 5200 0 5200 5200
38 0 6000 6000 -6000
40 9500 16000 25500 -6500
R 100 0 100 100
R 0 25400 25400 -25400
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Total 20300 50200 70500 -29900
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5. The only allegation against the appellant was that he allowed the sub-broker to exploit him and his conduct was in violation of the code of conduct prescribed under Schedule II read with Regulation 7 of Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992. The investigation was conducted and on the basis of the investigation an enquiry was held and a show cause notice was issued to the appellant and ultimately the appellant was found guilty of violating the code of conduct and in violation of the provisions of Regulations 4(b) of FUTP Regulations. This order which is passed by the respondent is under challenge before us.
6. The matter is simple. The appellant admits that he had all the trades done through the said sub-broker and it was done on the bolt screen and that these transactions were bona fide transactions. It was further submitted by the appellant that whatever trade was done by the sub-broker is a matter between the sub-broker and the said Mr. Shah. There cannot be any vicarious liability for the transactions done by the sub-broker with Mr. Shah. It was further submitted with considerable force that the impugned order is based on a strict liability and no nexus has been established between the sub-broker and the appellant on the one hand, or between the appellant and Mr. Shah. In the absence of any such material, it was submitted that the transactions having been done in a transparent way and on the bolt screen cannot be faulted and in the absence of material, a serious charge of violation of FUTP Regulations cannot be sustained as there was no proof that appellant acted in concert with the sub-broker.
7. I have carefully considered the submission for the learned counsel for the appellant and the respondent.
8. The turnover of the appellant during the year 1999 has been over Rs. 637 crore. The turnover in the scrip of the company in question was a mere Rs. 20 lakh during the period of investigation. This is rather insignificant and on the basis of such material it cannot be said that the appellant acted in concert with the sub-broker or with Mr. Shah for the purpose of price manipulation unless there is proof.
9. The appellant did not receive any remuneration except his brokerage amount. For a charge to be proved, it must be established that there was a nexus between a sub-broker and the broker. No such material is before us. The transactions were screen-based transactions and were at the prevailing price in the market at the relevant time. The turnover of the appellants transactions are a miniscule part of the total business done by the appellant in the year 1999.
10. The learned counsel for the appellant relied on many instances where SEBI and the Tribunal have taken a practical and lenient view in such circumstances to rehabilitate and give the broker an opportunity to mend his ways.
11. Reference was made to Chona Financial Services Pvt. Ltd. in appeal 95/03 dated 23.8.04 and to the cases referred to in the judgement. The relevant portion of the order is extracted below.
"The appellant submitted a few cases namely M/s. Bakliwala Investment, J.M. Morgan Stanley Retail Services Pvt. Ltd., Bama Securities as under, which have been found to contain by and large similar irregularities and have been only served with a letter of warning by SEBI.
- M/s. Bakliwala Investment Irregularities i. Provision for Tax for the interim period from April 1 to September 30, 2000 not made ii. Confirmations have not been obtained from Banks, Creditors and debtors by the broker. iii. Broker had not time stamped the order slip/records iv. Contract notes not serially numbered except for computer generated numbers on day-to-day basis which have no control. v. Contract notes not issued within the specified time. vi. Consolidated stamp duty not paid. vii. Client Registration forms were not completed viii. Order book was not maintained. ix. Delay in payment of funds x. Delay in delivery of securities xi. One client account being adjusted against another client without any authorization xii. Transactions with associate firms/companies separate set of ledger accounts as clients and others not maintained. xiii. Compliant register not maintained. xiv. Client account were used for other purposes xv. Margin money not collected xvi. In 10 cases, deals were done outside the NEAT System Order
1. Irregularities are basically technical lapses and do not deserve a substantive punishment.
2. Minor Penalty - Warning
- M/s. J.M. Morgan Stanley Retail Services Pvt. Ltd. Irregularities i. Failure to obtain client registration forms and agreement ii. Failed to maintain separate client account. Order Warning
- M/s. Bama Securities Irregularities i. Contract notes were missing ii. Acknowledgement from the clients not obtained iii. Not maintaining client registration forms Order Warning Reliance has been placed on a few other judgments as under in which similar irregularities were found and were served with a letter of warning.
- M/s. Ratanbali Capital Markets Ltd. Irregularities
- Non-maintenance of books of accounts
- Contract notes
- Non-collection of margins from clients
- Misuse of client's funds
- Share lending/borrowing
- Non-segregation of clients accounts with own account and for not reporting off-the-floor transactions to Stock Exchange Order Warning
- M/s. Twenty First Century Shares & Securities Ltd. Irregularities
- Non-maintenance of books of accounts * Delay in payment to clients
- Misuse of client's funds
- Non-segregation of clients accounts with own account and for not reporting off-the floor transactions to Stock Exchange
- Booking payment in different clients account.
- Loan against shares of holding company and loan transaction in clients account. Order Warning
- M/s. Sanjay C. Bakshi Irregularities
- Not maintaining margin registers
- Dealing with unregistered sub-brokers
- Not entering into agreement with few clients * Non-segregation of clients funds with own funds
- Dealing with broker of other Stock exchange without getting registered as a sub-broker
- Irregularities in respect of contract notes
- Delay in payment/delivery of funds/shares to clients Order Warning
- M/s. Mahesh Kothari Share & Stock Brokers Pvt. Ltd. Irregularities
- Non-maintenance of books of accounts
- Dealing with unregistered sub-brokers
- Irregularities in issuance of contract notes
- Non-segregation of clients account with own account, misuse of client's fund
- Delay on delivery of securities and not reporting off the floor transactions Order Warning
- M/s. Mukesh Sawhany Irregularities
- Non-maintenance of document registers
- Irregularities in issuance of contract notes
- Non-maintenance of separate client account
- Non-segregation of separate client account with own account
- Not reporting off the floor transactions
- Non redressal of investor complaints Order Warning"
12. It was further submitted that the allegations and indeed and the investigation was for the period between October to December 1999 and the show cause notice was issued in 17.3.2004. It is submitted that there is an inordinate delay in issuing the show cause notice.
13. It was submitted that by Mr. Dipan Merchant, the learned senior counsel for the respondent that the investigation took some time and the enquiry also took some time and there has been no delay. It was further submitted that the law requires that there should be an enquiry under the Securities and Exchange Board of India (Procedure for holding Enquiry by Enquiry Officer and imposing penalty) Regulations, 2002 and the Regulation requires issue of show cause notice and then the matter is placed before the respondent for further action on the basis of the enquiry report.
14. Therefore I agree with the submission of the learned senior counsel of the respondent that there has been no delay in the facts and circumstances of this case.
15. It is submitted by the appellant that the appellant has a huge turnover running into crores of rupees and any period of ban from the securities market will ruin the business and render the workers unemployed. The appellant also assures the Court that all care will be taken hereafter in dealing with sub-brokers with respect to any alleged price manipulation or any other violation. It is also stated that BSE has had made subsequent inspection in usual course and have not found fault with the appellant in any way with regard to any allegation.
16. I therefore hold that no case has been made out against the appellant under the FUTP Regulations since no nexus has been brought out between the broker and the sub-broker. However, there appears to be some lack of due skill, care and diligence on the part of the appellants in the facts of the present case. In these circumstances, the penalty imposed on the appellant by the respondent is modified from three months to a warning.
17. The appeal is disposed of accordingly. No order as to costs.