Securities Appellate Tribunal
Harikishan Hiralal vs Sebi on 3 December, 2009
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.134 of 2009
Date of decision: 3.12.2009
Harikishan Hiralal
R-638, Rotunda Bldg., 6th Floor,
B.S. Marg, Fort,
Mumbai - 400 023. ..... Appellant
Versus
Securities and Exchange Board of India
SEBI Bhawan,
Bandra-Kurla Complex, Bandra (E),
Mumbai - 400 051. ..... .Respondent
Mr. Vinod S. Parekh, Advocate for the Appellant.
Dr. Poornima Advani, Advocate with Ms. Harshada Nagare and Mr. Debashish Kotoky Advocate for the Respondent.
CORAM : Justice N.K. Sodhi, Presiding Officer Samar Ray, Member Per : Justice N.K. Sodhi, Presiding Officer (Oral) This appeal is directed against the order dated June 4, 2009 passed by the adjudicating officer holding the appellant guilty of violating Regulations 4(1) and 4(2)(a),
(b) and (g) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (for short the Regulations). The appellant has also been found guilty of violating the code of conduct prescribed for stock brokers and sub-brokers by the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (for short the Broker Regulations).
2. The appellant is a stock broker registered with the Securities and Exchange Board of India (for short the Board). Trading in the scrip of Karuna Cables Ltd. was investigated for the period from July 1, 2004 to October 29, 2004 and it was observed that the price of the scrip had risen enormously during this period. The Board found that 2 a large number of brokers who traded in the scrip had executed circular trades between themselves which contributed to the volumes and price rise in the scrip. Accordingly, a common show cause notice dated January 19, 2007 was issued to as many as 11 stock brokers including the appellant herein. The only charge that was leveled against the appellant is contained in paragraph 2 of the show cause notice which is reproduced hereunder for facility of reference:-
"During the period July 1, 2004 to October 29, 2004, the price of the scrip had risen by 110.5% from an opening price of Rs.9.50 on July 01, 2004 to the period high of Rs.20.00 on October 28, 2004 to close at Rs.17.09 on October 29, 2004. The price had mainly increased from Rs.12.50 to Rs.17 during the sub-period from September 27, 2004 to October 19, 2004 i.e. almost 36% rise in 17 trading days. Major concentration on basis of gross purchase and sale was observed of the members, SPJ Stock (646) trading on own account (23.8% of market gross) and Bhagwandas & Co (77) dealing on behalf of clients, Sunil Purohit and Tejash Ghelani (17.8% of market gross). Circular trading between the following members was observed to be contributing to the volumes and price rise in the scrip. On an average, trading between these members has contributed to 80.5% to volume. The members are Adolf Pinto (13), Bhagwandas & Co (77), Peninsular Capital Market Ltd (156), Sanchay Fincom Ltd (204), Vijay J Thakkar (VSE Securities Ltd) (253), M/s Harikrishan Hiralal (267), Galaxy Broking Ltd. (513), S.P. Jain Securities P. Ltd. (620), SPJ Stock Brokers P Ltd (646), P.J. Choudhary (740), Uttam Financial Services Ltd (779) and ISJ Securities P Ltd (799). Based on the above facts, investigation relating to buying, selling or dealing in the shares of the company was initiated for the period from July 01, 2004 to October 29, 2004 as trades which do not appear to be genuine were executed during this period. The price of the scrip rose from an opening price of Rs.9.50 on July 01, 2004 to the period high of Rs.20.00 on October 28, 2004 and closed at Rs.17.09 on October 29, 2004. The relevant findings of investigations alongwith the documents relied upon by SEBI are enclosed and marked herewith as Annexure II."
A reading of the aforesaid paragraph leaves no room for doubt that the appellant was charged for having executed circular trades alongwith ten other brokers whose names appear in the paragraph. It was specifically alleged that they all executed circular trades between themselves. The appellant filed a detailed reply to the show cause notice denying the allegations of circular trading. On a consideration of the material collected during the course of the investigations and also during the course of the enquiry, the adjudicating officer came to the conclusion that the charge leveled against the appellant stood established and that he violated the provisions of Regulations 4(1) and 4(2)(a), (b) and (g) of the Regulations. The adjudicating officer also found that the appellant had violated the code of conduct prescribed for the stock brokers. Accordingly, by his order 3 of June 4, 2009 he imposed a monetary penalty of Rs.7 lacs on the appellant. Hence this appeal.
3. We have heard the learned counsel for the parties who have taken us through the record and are of the view that the appeal deserves to succeed on the ground that the adjudicating officer has recorded contradictory findings in the order under appeal. After examining the details of the trades executed by the appellant this is what the adjudicating officer held in para 4.9 of the impugned order.
"This pattern of trading can not be termed as mere co-incidence, it clearly signifies to some kind of pre-arrangement between the brokers before trading in the scrip. In the instant matter it is apparent that relatives of the noticee were the clients and placing the orders. This clearly signifies to the fact that the trades of noticee have led to increase in the volumes of the scrip. As the trades were entered solely for the purpose of generating artificial volumes in the scrip of Karuna which was not very actively traded. There was no genuine sale or purchase, no actual transfer of beneficial ownership in the scrip of Karuna on behalf of noticee and it appears that this was done to create an illusion in the mind of public that the scrip is highly liquid."
Thereafter he examined all the material on the record and the case law that was cited before him and while dealing with the charge of circular trading he observed as under in paragraph 4.20 of his order as under:-
"However, from the above discussion, I am of the view that the charges of circular trading cannot be crystallized as against noticee in absence of further details of the clients of the counterparty broker. Further, from the records available it is very difficult to prove that the same sets of shares were circulated among the same group. The clear linkages are also not coming up among the group of brokers. However, the charge of synchronized trading in the scrip of Karuna resulting in creation of artificial volumes of the scrip is established as against the noticee. It is thus concluded that the noticee was hands in gloves with other brokers and took the market for a ride. It had traded with the counter-party brokers, in synchronized way."
It is, thus, clear that the adjudicating officer has recorded contradictory findings in the impugned order. In paragraph 4.9 he holds that the pattern of trading was not a coincidence and that it signifies some kind of pre-arrangement between the brokers. In paragraph 4.20 he concludes that the charge of circular trading has not been crystallized against the appellant for want of details of clients of the counter-party broker. He has also recorded a firm finding that there is nothing on the record to prove that the same set of shares were circulated among the same group. It is pertinent to mention here that circular 4 trading means trading by a group of brokers whereby shares are traded from one member of the group to the other so that the shares remain within the circle. Such trades do not bring about a change in the beneficial ownership of the shares traded and only create artificial volumes and sometimes variation in the price of the scrip. The adjudicating officer has clearly found that there were no linkages between the group of brokers who traded in the scrip. In the absence of any such link and there being no circular trading we fail to understand how the adjudicating officer could hold the appellant guilty of violating the regulations referred to above. On the one hand, he finds that there are no linkages among the group of brokers and, at the same time, records a finding that the appellant was hand in glove with other brokers and took the market for a ride. This apart, the charge of synchronization has not been leveled in the show cause notice. It is true that there cannot be circular trading without manipulative synchronization of trades but brokers can execute manipulative synchronized trades without indulging in circular trading. Synchronization per se is not illegal because every buy and sell order has to synchronize before a trade is executed. In the case of a genuine trade, the synchronization takes place through the exchange mechanism but quite often traders and brokers manipulate the trades on the system to ensure that the buy and sell orders match and it is this manipulative synchronization which is prohibited by the Regulations. The adjudicating officer is obviously referring to manipulative synchronization in paragraph 4.20 of the order when he holds the appellant guilty of synchronized trading.
4. The learned counsel for the respondent Board very strenuously argued that the appellant was guilty of synchronized trades and she referred to the order logs and trade logs which were furnished to the appellant alongwith the show cause notice. She also made an attempt to establish that the trades among the brokers referred to in paragraph 2 of the show cause notice were circular in nature. As already observed, manipulative synchronization by itself is a serious market irregularity/illegality for which action could be taken against the delinquents and before any broker can be found guilty of the charge it is necessary that the charge is spelt out in the show cause notice. The relevant part of the show cause notice has been reproduced hereinabove and the only charge that was leveled against the appellant was that he alongwith other brokers had executed circular 5 trades. There is no charge of synchronization of trades. Synchronization is an act which cannot be carried out single handedly. It is, therefore, essential to inform the appellant of the person or the broker with whom he synchronized the trades. Nothing of this kind was stated in the show cause notice. In this view of the matter, no finding of manipulative synchronization of trades could be recorded in the absence of a charge in the show cause notice. This has resulted in the violation of the principles of natural justice as the appellant never had the opportunity of controverting the allegation. At this stage it is pertinent to refer to the observations of the Supreme Court in Canara Bank vs. Debasis Das (2003) 4 SCC 557 and this is what their Lordships observed :-
"The adherence to principles of natural justice as recognized by all civilized States is of supreme importance when a quasi-judicial body embarks on determining disputes between the parties, or any administrative action involving civil consequences is in issue. These principles are well settled. The first and foremost principle is what is commonly known as audi altram partem rule. It says no one should be condemned unheard. Notice is the first limb of this principle. It must be precise and unambiguous. It should apprise the party determinatively of the case he has to meet. Time given for the purpose should be adequate so as to enable him to make his representation. In the absence of a notice of the kind and such reasonable opportunity, the order passed becomes wholly vitiated. Thus, it is but essential that a party should be put on notice of the case before any adverse order is passed against him. This is one of the most important principles of natural justice. It is after all an approved rule of fair play. The concept has gained significance and shades with time"
Faced with this situation, the learned counsel for the respondent Board vehemently argued that no prejudice was caused to the appellant and that he properly understood the charge leveled against him on the basis of the documents that have been annexed to the show cause notice. We are unable to accept this contention. In the absence of any charge of synchronization of trades in the show cause notice, no finding could be recorded against the appellant. In this regard we may refer to the observations of the Supreme Court in S.L. Kapoor vs. Jagmohan AIR 1981 SC 136 and this is what the learned Judges observed in paragraph 16 of the judgment:-
"In our view, the requirements of natural justice are met only if opportunity to represent is given in view of proposed action. The demands of natural justice are not met even if the very person proceeded against has furnished the information on which the action is based, if it is furnished in a casual way or for some other purpose. We do not suggest that the opportunity need be a 'double opportunity' that is, one opportunity on the factual allegations and another on the proposed penalty. Both may be rolled into one. But the person proceeded against must know that he is 6 being required to meet the allegations which might lead to a certain action being taken against him. If that is made known the requirements are met."
The aforesaid observations are a complete answer to the argument advanced on behalf of the respondent Board.
For the reasons recorded above, the appeal is allowed and the impugned order set aside with no order as to costs.
Sd/-
Justice N.K.Sodhi Presiding Officer Sd/-
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