Securities Appellate Tribunal
Ramaben Samani Finance Pvt. Ltd vs Sebi on 22 October, 2007
IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.91 of 2006
Date of Decision: 22.10.2007
Ramaben Samani Finance Pvt. Ltd. ...... Appellant
Versus
The Adjudicating Officer
Securities and Exchange Board of India ..... Respondent
Present : Shri Dipan Merchant, Senior Advocate with Shri Ruchir Tolat, Advocate for the Appellant Dr. Poornima Advani, Advocate with Ms. Sejal Shah, Advocate for the Respondent CORAM Justice N.K. Sodhi, Presiding Officer Utpal Bhattacharya, Member Per: Justice N.K. Sodhi, Presiding Officer (Oral) This order will dispose of two Appeals nos.90 and 91 of 2006 both of which are directed against the order dated May 25, 2006 passed by the adjudicating officer in which common questions of law and fact arise.
2. Securities and Exchange Board of India (for short "the Board") carried out investigations in regard to the trading in the scrip of Rashel Agrotech Ltd. (hereinafter called "the company"). Investigations revealed that some of the major trades were in the nature of synchronized deals and that the client ASK Holding Pvt. Ltd. (hereinafter referred to as "the client") had dealt in the scrip of the company through two different brokers namely R.R. Bohra and Ramaben Samani Finance P. Ltd. - the appellants herein. In view of the findings recorded during the course of the investigations, the Board initiated adjudication proceedings against the appellants. Relying on the trade and order logs pertaining to the trades executed by the client through the two appellants as brokers, the adjudicating officer found that the trades executed were fictitious as the buyer and the seller was the client. Since the appellants acted as brokers they were found guilty of having violated Regulation 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. He accordingly imposed a monetary penalty of Rs.10 lacs on each of the two appellants. Hence these appeals.
3. We have heard the learned counsel for the parties. Both of the appellants are member brokers of the Bombay Stock Exchange and are registered with the Board. The client has been selling the shares of the company through the appellant in Appeal no.91 of 2006 and was purchasing the same shares through the appellant in Appeal no.90 of 2006. The trades were obviously fictitious because the buyer and the seller cannot be the same person. It is not in dispute that the appellants acted as brokers when the shares were bought and sold. The short question that arises for our consideration is whether the appellant at the time of executing the trades on behalf of the client knew that it was executing fictitious trades and that while selling the scrip through one broker it was simultaneously buying the same through the other. R.R. Bohra the appellant in Appeal no.90 of 2006 took the following stand in his reply to the show cause notice:
"You will kindly appreciate that now-a-days, when the trades are being executed online on automated trading system of the Exchange through the trading terminals, it is not at all possible for a member of the Exchange to know about the counter-party of any of the transactions made through his terminals. Thus, it was not possible for us to know whether against any purchase order of the shares of M/s Rashel Agro-tech Ltd, M/s Ramaben Samani Finance Pvt. Ltd. was a counter-party and the sale orders were executed through them. We, therefore, deny having knowledge of any synchronized trading taking place in this scrip through our terminals.
Sir, kindly appreciate that our client Shri Ashok Kumar Jain, Director, ASK Holdings Pvt. Ltd., was placing the orders of purchase of various securities, taking delivery of the same on the pay-out day and was regularly making payment to us towards purchase of these securities. Thus, there was no reason for us to doubt that any artificial trade or synchronized trading was taking place. As stated above, we had no knowledge of our client giving any instructions to M/s Ramaben Samani Finance Pvt. Ltd. for the sale of shares of the same company and, you will kindly appreciate that, there was no way for us to know about the happenings of the same. We vehemently deny any knowledge of the nature of these transactions."
Ramaben Samani Finance (P) Ltd. - the appellant in the other appeal also took a similar stand.
4. An identical question came up for our consideration in Appeal no.27 of 2006 decided on 20.6.2006 and this is what the Tribunal held:-
"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 are 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 the 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."
This view has been reiterated by us in Bipin R. Vora vs. Securities and Exchange Board of India Appeal no.62 of 2006 decided on 13.9.2007. The question that now arises is whether there was any material before the adjudicating officer to conclude that the appellant was a party to the execution of fictitious trades. It is not in dispute that on the screen based trading the broker who puts in the buy/sell order can only know the particulars of his client and it is well nigh impossible for him to know who the counter party is or even his broker at the time when the trade is executed. These details/particulars can be found out only on a detailed enquiry after the trade is executed. It is primarily for this reason that we held that the link between the client and the broker in the matter of executing fictitious trades has to be brought out and there has to be enough material on record to show that the broker knew about the game plan at the time of executing the trade. Merely because a person acts as a broker will not lead us to the conclusion that he knew about the fictitious nature of the trade. The learned counsel for the Board brought to our notice the letter dated 12.3.2004 written by the appellant in Appeal no.91 of 2006 wherein it is mentioned "one Mr. Ashok Jain, the Director of the said ASK Holdings Pvt. Ltd. used to attend to our office and used to give instructions for effecting transactions for and on behalf of the said ASK Holdings Pvt. Ltd. and the transactions were effected in the presence of the said Mr. Ashok Jain through the BOLT". She urged that it could be inferred from this letter that the appellant as a broker knew about the game plan of the client. It is not possible to draw such an inference. Orders could be placed on a broker on phone or in writing or by the client personally visiting the broker. Ours is a case where the orders were being placed personally. We cannot read anything more in the aforesaid letter. Even the presence of Mr. Ashok Jain at the time of execution of the trades would make no difference. While following the view taken by this Tribunal in the aforesaid cases we have no hesitation in holding that there was no material on record in this regard and that the adjudicating officer has recorded his findings merely because the appellants acted as brokers. This in our view is not permissible.
5. The learned counsel appearing for the Board took us through the provisions of the Regulations and she strenuously contended that Regulation 4 prohibits any person from entering into transactions with the intention of artificially raising or depressing the prices of the securities nor does the Regulation permit any person to indulge in any act which is calculated to create a false or misleading appearance of trading in the securities market. It is true that the Regulations prohibit any person from executing transactions which are not genuine trade transactions. The client had executed fictitious trades and we are informed that he has been suitably penalized. The appellants would be covered by the prohibitions contained in Regulation 4 only if it is established that they knew at the time of execution of the trade that the transactions were not genuine. We have already observed that this material is lacking and the present case is squarely covered by our observations in Kasat Securities case (supra). In this view of the matter we cannot uphold the impugned order.
In the result the appeals are allowed and the impugned order set aside qua the appellants with no order as to costs. In pursuance to our interim order the appellants have deposited a sum of Rs.5 lacs with the Board. They shall be entitled to claim a refund of that amount. No costs.
Sd/-
Justice N.K. Sodhi Presiding Officer Sd/-
Utpal Bhattacharya Member RHN 22.10.2007