Securities Appellate Tribunal
Millenium Equities (India) Pvt. Ltd. vs Securities And Exchange Board Of India on 29 November, 2006
JUDGMENT
N.K. Sodhi, J. (Presiding Officer)
1. Challenge in this appeal is to the order dated 13.9.2004 passed by the then Chairman of the Securities and Exchange Board of India (for short the Board) suspending the certificate of registration of the appellant as a stock broker for a period of six months. Facts giving rise to this appeal are as under.
2. The Board investigated the transactions in the shares of Global Trust Bank, Shonkh Technologies India Ltd. and DSQ Software Lid. (for short GTB, Shonkh and DSQ respectively). Investigations revealed that the price of the share of GTB had moved sharply during November 1999 to January 2000 and also during the period from 1.4.2000 to 31.8.2000. Similarly, the price of the scrip of Shonkh had witnessed a significant rise during the period from August to September 2000 and it rose from Rs, 70 to Rs. 300/-. The price of the scrip of DSQ witnessed a sharp increase from Rs. 250/- in October 1999 to Rs. 2631/- in March 2000 and a sharp fall thereafter.
3. The investigations also disclosed that these fluctuations were accompanied by trading in large volumes on the stock exchanges particularly the Bombay Stock Exchange and the National Stock Exchange (for short BSE and NSE). The mailer was enquired into by the Board and it found that on 5.2.2001 17 trades in the scrip of Shonkh had been synchronised by the buyer and the seller and in two of those trades the appellant herein had acted as a broker on behalf of the buyer which was Panther Fincap and Management Services Ltd. (for short Panther) which is an entity controlled by one Mr. Ketan Parekh who has been found by the Board to have had rigged the securities market in a big way. Similarly, there were 15 trades in the scrip of Shonkh executed on 20.2.2001 which were found to be synchronised and matched out of which the appellant acted as a broker for Panther in one of the trades. Since the buy and sell orders were placed almost at the same lime or within a gap of few seconds with each other, the trades were' found to be synchronized.
4. It was further found that on 8.11.2000 the appellant as a broker had purchased 1 lac shares of GTB on behalf of Panther which is a Ketan Parekh entity. The appellant as a broker had also placed buy orders for the shares of DSQ and between the period from 23,12.1999 to 26.6.2000 the appellant had executed 17 trades on behalf of its client Hulda and these transactions were also found to have been executed with a prior arrangement between the buyer and the seller.
5. As regards the trades executed by the appellant in the scrip of Shonkh, the Board found from the pattern of trading that there was a well thought out plan for creating artificial scrip and to manipulate the price of the (sic). The Board has also recorded a finding that there is no direct evidence to prove that the broker had aided and abetted the entities associated with Ketan Parekh.
6. As regards the trades in the scrip of GTB and the role of the appellant as a broker the Board has recorded a Finding that there was only one trade by the broker and that there is no direct evidence to its complicity in the manipulation of price by Mr. Kctan Parekh and his entities. It is thus clear that the Board itself did not find any material on the record to show that the appellant as a broker was a party to the game plan of synchronisation and executing fictitious trades, in the scrips of Shonkh and GTB.
7. We will now deal with the trades executed by the appellant as a broker in the scrip of DSQ, As already noticed above there were 17 trades executed during the period of six months which have been found to be synchronised and fictitious trades. It is true that the trades have matched on the screen but does it follow that the appellant as a broker knew about the game plan of the buyer and the seller. The learned Counsel appearing fur the respondent Board very strenuously urged before us that a trade cannot match on the screen of the exchange without the active connivance of the broker, We are unable to accept this position. There can be a variety of reasons for a trade matching on the screen of the exchange. A trade between a genuine buyer and a seller has to match on the screen before it can be executed. Merely because a trade has matched both in regard lo the price and quantity and that the buy and the sell orders were placed at the same time cannot lead us to the conclusion that the broker had knowledge of the fictitious trade being executed between the buyer and the seller, On a screen based trading system that is adopted by the exchanges it is not possible for a broker to know who the counter party is at the time when the trade is executed. Therefore if a broker is to be attributed knowledge of a (sic) trade or synchronised trade being executed, the Board has to have (sic) some other material on the record from which such knowledge could be inferred. Merely because the appellant acted us a broker would not lend us to the conclusion that he had knowledge of the wrong doing. It is true that the trades have been found to be synchronised and fictitious but those were executed by the parties and it was on their instructions that the brokers acted.
8. Even in the case of the dealings of the appellant in the scrip of DSQ we find there is no material on the record other than the fact that it acted as a broker in 17 trades over a period of more than 6 months. We cannot therefore uphold the finding of the Board that "The pattern of trading thus gives rise to a strong suspicion regarding a meeting of minds between the said broker and their counterparties which were entities associated with the promoters of the company.
9. In somewhat similar circumstances we made the following observations in Kasat Securities Pvt. Ltd. v. Securities and Exchange Board of India Appeal No. 27 of 2006 decided on 20.6.2006.
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 the seller even getting to meet. Therefore it is 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.
These observations apply with full force to the facts of this case.
10. In view of the above we are unable to uphold the impugned order imposing on the appellant the penalty of suspension of certificate of registration for six months.
11. In the result, the appeal is allowed and the impugned order dated 13.9.2004 set aside leaving the parties to bear their own costs.