Securities Appellate Tribunal
Ruchiraj Shares And Stock Brokers Pvt. ... vs Sebi on 24 January, 2011
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 206 of 2010
Date of Decision : 24.01.2011
Ruchiraj Shares and Stock Brokers Pvt. Ltd.
306, Natware Chamber, 3rd Floor,
94, Nagindas Master Road, Fort,
Mumbai - 400 023. ...Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai - 400 051. ...Respondent
Mr. Rajesh Khandelwal, Advocate with Ms. Poonam Gadkari, Advocate for the Appellant.
Mr. Kumar Desai, Advocate with Ms. Daya Gupta and Ms. Harshada Nagare, Advocates for the Respondent.
CORAM : Justice N.K. Sodhi, Presiding Officer P.K. Malhotra, Member S.S.N. Moorthy, Member Per : Justice N.K. Sodhi, Presiding Officer (Oral) The Securities and Exchange Board of India (hereinafter called the Board) received a complaint stating that the promoters of Kolar Biotech Ltd. (referred to hereinafter as the company) had perpetrated a fraud of over ` 1000 crores and that Raj Kumar Basantani who is the main promoter had fled from the country. The Board carried out investigations in the scrip of the company during the period from July, 2004 to August, 2004. The statement of one Ashok Bhagatani, a director of Kolar Sharex Pvt. Ltd. which is an associate of the company was recorded during the course of investigations and he stated that Raj Kumar Basantani (Basantani) had called him up and introduced Pankaj Bhai and Satish Bhai to him for the purpose of trading in the scrip of the company. Satish Bhai, in turn, introduced one Basant Malpani to Ashok Bhagatani and Pankaj Bhai introduced one Manish Bhai to him and 2 requested him to provide a terminal of Kolar Sharex Pvt. Ltd. to Manish Bhai. According to Ashok Bhagatani, trading in the scrip of the company and providing a trading terminal to Manish Bhai had the approval of Basantani. He further stated that trading was done in the scrip of the company with a view to manipulate its price and create artificial volumes on the trading screen. On the basis of the statement made by Ashok Bhagatani, the Board investigated the trades executed in the scrip of the company and found that several clients and their brokers including the appellant had traded in the scrip in a manipulative manner and thereby manipulated the price of the scrip and also created artificial volumes. The appellant before us is a stock broker registered with the Board and its role in the entire game plan was that it bought and sold shares on behalf of three clients namely, Girdharbhai Karu, Mahesh Mistry and Cavalier Securities Ltd. Investigations revealed that the trades executed by the appellant on behalf of its clients were matched and synchronized trades which manipulated not only the price but also volumes. On the basis of the investigations carried out by the Board, the appellant was served with a notice dated April 22, 2008 alleging violation of Regulation 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and also the code of conduct prescribed in Schedule II read with Regulation 7 of the Securities and Exchange Board of India (Stock Brokers and Sub- Brokers) Regulations, 1992. It was alleged that the appellant had executed structured / synchronized trades on behalf of its clients the details of which were furnished in Annexure III to the notice. It was further alleged that in regard to the sales made by the appellant on behalf of Mahesh Mistry and Girdharbhai Karu, the market obligations of these clients were met after the shares were transferred to their demat accounts from the demat accounts of entities / individuals who were related / connected / associated with the company / Basantani. The case of the Board is that the appellant as a stock broker did not verify whether the shares were available in the demat accounts of its clients when it placed huge sell orders on their behalf. It is on account of these lapses that the appellant was alleged to have violated the aforesaid provisions. The appellant filed its reply to the show cause notice denying all the allegations. On a consideration of the material collected during the course of the 3 investigations and the enquiry conducted by the adjudicating officer, he came to the conclusion that the appellant as a stock broker had executed structured / synchronized trades and that it had received shares from the demat accounts of third parties to meet the market obligations of its clients. He, therefore, concluded that the charges levelled against the appellant stood established and by his order dated June 30, 2010, he imposed a monetary penalty of ` 12 lacs for executing manipulative trades and another sum of ` 2 lacs for violating the code of conduct prescribed for stock brokers. It is against this order that the present appeal has been filed.
2. We have heard the learned counsel for the parties who have taken us through the record. The first charge against the appellant is that it had executed matched and synchronized trades while purchasing shares of the company on behalf of its three clients namely Girdharbhai Karu, Mahesh Mistry and Cavalier Securities Ltd. We have perused the trade and order logs the copies of which were furnished to the appellant along with the show cause notice and are satisfied that the charges stand wholly established. There are a number of orders placed by the appellant for the purchase of large quantity of shares of the company on behalf of its clients. These orders resulted in several trades and the interesting part is that in every trade the counter party was the same. For instance, on August 16, 2004 several orders for the purchase of large quantity of shares were placed by the appellant which resulted in several trades and in each trade the counter party was Million Investrade Ltd. Investigations had found out that Million Investrade Ltd. was also a company controlled by Raj Kumar Basantani who was the main promoter of the company whose shares were being traded. Not only this, the counter party broker in each trade was Kolar Sharex Pvt. Ltd. another associate of the company. The buy and sell orders matched within seconds. We are, therefore, satisfied that large number of orders placed on August 16, 2004 were executed in a matched and synchronized manner which clearly go to indicate that the scrip was being manipulated atleast in terms of volumes. The first charge of manipulative trading done by the appellant on behalf of its clients, thus, stands established.
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3. As regards the second charge we do not think that the same has been established. The adjudicating officer in para 35 of the impugned order has observed as under:
"However, it was observed from the investigation report that the client transferred the shares from the demat account number 16481986 towards market delivery".
It is the appellant's case that when it traded on behalf of Mahesh Mistry, the latter gave this account number as his demat account. This information was furnished by the appellant to the investigating officer during the course of the investigations and we have on record a letter dated October 20, 2005 by which this information was furnished. We find from this document that the appellant had informed the investigating officer way back in the year 2005 that Mahesh Mistry had given his demat account number as 16481986. This fact is also clear from the client registration form which was filled up when the appellant executed the trades on behalf of Mahesh Mistry. A copy of this form is also on the record. We are, therefore, satisfied that when the appellant sold shares on behalf of Mahesh Mistry, it received shares towards market delivery from the demat account of the client. It is true that Mahesh Mistry, in turn, had received 33,00,000 shares from the pool account of Kolar Sharex Pvt. Ltd. which was the counter party broker and an associate of the company and another 19,90,000 shares from the demat account of Adam Comsof Ltd. which is also an associate of the company but the appellant as a stock broker was not really concerned as to from where the client had received the shares. Once the shares are in the accounts of the clients from where the delivery obligations are met, the broker has no business to find out the source from where those shares had come. Surely, the appellant cannot be blamed for this.
4. Since the second charge has not been established, the learned counsel appearing for the appellant strenuously argued that the amount of penalty levied by the adjudicating officer should proportionately be reduced. We have given our thoughtful consideration to this contention but are unable to accept the same. The first charge pertaining to manipulative trading in the scrip of the company has been duly 5 established. It is, indeed, a serious charge for which penalty could be levied upto ` 25 crores. The adjudicating officer after taking note of the provisions of Section 15J of the Securities and Exchange Board of India, 1992 has levied only a sum of ` 14 lacs. It is clear that the appellant not only executed manipulative trades but also violated its code of conduct which prohibits the execution of such trades. An amount of ` 14 lacs as imposed by the adjudicating officer cannot, in the circumstances of the case, be said to be excessive.
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/-
P.K. Malhotra Member Sd/-
S.S.N. Moorthy Member 24.1.2011 Prepared and compared by:
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