Securities Appellate Tribunal
Porecha Global Securities Pvt. Ltd. vs Sebi on 5 August, 2010
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 164 of 2009
Date of decision: 05.08.2010
Porecha Global Securities Pvt. Ltd.
PG-14, Rotunga Building,
Stock Exchange, Gr. Floor,
B.S. Marg,
Mumbai - 400 023. ...... Appellant
Versus
The Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, "G" Block,
Bandra Kurla Complex, Bandra (East),
Mumbai. ...... Respondent
Mr. J.J. Bhatt, Advocate for the Appellant.
Mr. Kumar Desai with Ms. Pranita Mhatre, Advocates for the Respondent. CORAM : Justice N.K. Sodhi, Presiding Officer Samar Ray, Member P.K. Malhotra, Member Per : Justice N.K. Sodhi, Presiding Officer (Oral) This order will dispose of two Appeals no.164 and 165 of 2009 both of which raise identical questions of law and fact and are directed against a common order. The appellants in both the appeals are stock brokers registered with the Securities and Exchange Board of India (for short the Board). Unit Trust of India (UTI) purchased on October 23, 2000 one lac shares of Mobile Telecommunications Ltd. (for short the company) from Credit Link Finvest Pvt. Ltd. (for short Credit Link). This purchase was made through the trading system of the Bombay Stock Exchange Limited (BSE) and Porecha Global Securities Pvt. Ltd, the appellant in Appeal no. 164 of 2009 acted as the broker for both the parties. Since the buyer and the seller had a common broker, it was a cross deal. UTI also purchased 14,11,000 shares from Credit Link and Cardioid Securities Pvt. Ltd. using the services of two brokers namely, Jayant Amerchand 2 Kalidas and Arun Porecha, the appellant in Appeal no. 165 of 2009. These were all negotiated deals and the brokers of the buyer and the sellers had executed the trades on the screen of BSE in the price and order matching mechanism of that exchange like any other ordinary trade. Since the deals between UTI and the sellers were negotiated, the buy and sell orders were put into the trading system at almost the same time for the same quantity and at the same price. These orders resulted in trades and the shares were purchased by UTI. It is common case of the parties that all these deals were delivery based. Since the buy and sell orders had matched to perfection, the Board became suspicious and carried out investigations into the trades. Having found that the two appellants had executed the aforesaid matching trades by which UTI had purchased the shares, it (Board) initiated proceedings against them under Regulation 6(1) of the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 which were then in force. An enquiry officer was appointed who served the appellants with a show cause notice dated July 23, 2004. It was alleged that the appellants as brokers while trading on behalf of UTI had executed structured and cross deals between the two of them and in collusion with the selling member M/s. Jayant Amerchand Kalidas Share and Stock Brokers in the scrip, had distorted the equilibrium of the scrip of the company. This, according to the show cause notice, created artificial volumes in the scrip. Accordingly, the following charge was levelled against the appellants:
"Further, investigation has revealed that PGSPL has executed trades for UTI by entering into these arranged/matched deals with Jayant Amerchand Kalidas Share and Stock Brokers and by entering into cross deals and structured deals with AP enabled your client's viz. Credit Link Finvest Pvt. Ltd. and Cardioid Securities Pvt. Ltd. to off load their shares to UTI. Thus, PGSPL and AP have violated Regulation 4(a)(b) and (c) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 inter-alia.........................."
It was further alleged that the appellants had failed to exercise due skill, care and diligence in the conduct of their business while acting as brokers in the aforesaid deals/trades and thereby violated Regulation 7 read with Schedule II to the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992. Both the appellants filed their separate reply denying the allegations made against them. The enquiry officer after holding an enquiry and affording an opportunity of hearing, held 3 that the charges levelled against the appellants stood proved and accordingly, by his two separate reports dated November 21, 2008 recommended that the certificates of registration of the appellants be suspended for a period of two months. On receipt of this report, the whole time member served the appellants with another show cause notice furnishing a copy of the report to them and calling upon them to show cause why the same be not accepted. The appellants filed their reply to this show cause notice as well and on a consideration of the matter and after affording a personal hearing to the appellants, the whole time member found that the charges against them stood established and by his order dated September 9, 2009 suspended their certificates of registration for a period of one month. It is against this order that the present appeals have been filed.
2. We have heard the learned counsel for the parties and are of the view that the appeals deserve to be allowed. It is clear from the record that UTI was in the market to purchase a large quantity of shares of the company and in fact bought 14,11,000 shares and the appellants acted as its brokers. As already observed, the buy and sell orders that were punched into the trading system were as a consequence of a deal negotiated between UTI as the buyer and Credit Link and Cardioid Securities Pvt. Ltd. as the sellers. The negotiated deals were then executed through the trading system by punching in matching buy and sell orders. Merely because matching orders were punched into the system, the Board concluded that the appellants were guilty of violating Regulation 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995. We do not think that the Board was right in reaching such a conclusion. Negotiated deals executed through the screen of the stock exchange in the price and order matching mechanism is a perfectly valid method of executing such deals and the same stand sanctified by the Board's circular dated September 14, 1999, the relevant part of which reads as under:
"All negotiated deals (including cross deals) shall not be permitted in the manner prescribed in circulars mentioned above and all such deals shall be executed only on the screens of the exchanges in the price and order matching mechanism of the exchanges just like any other normal trade."4
It is common case of the parties that after the deal had been negotiated between the buyer and the sellers, the brokers executed the same on the screen of BSE as per the price and order matching mechanism of that exchange. It is not even alleged in the show cause notice that the trades were manipulated in any manner. As already observed, merely because matching orders were put into the system in pursuance to a negotiated deal, they do not violate Regulation 4 of the Regulations so long as the requirements of the circular are met. These requirements are that the trades should be executed through the mechanism of the exchange. As is clear from the circular itself, the object was not to bar negotiated deals but only to make them more transparent so that they contribute to the price discovery and that all those in the market willing to trade in the scrip have the benefit of the best possible price. According to the Board, the trades which are executed through the trading system of the exchange meet all these requirements. We are, therefore, satisfied that the trades executed by the two appellants as brokers on behalf of the buyer and sellers were in accordance with the aforesaid circular and did not in any way violate Regulation 4 of the Regulations. Moreover, the trades executed on behalf of UTI were not speculative in nature and were delivery based. When the trades executed by the appellants were perfectly legal and in accordance with the circular issued by the Board itself, there is no question of the appellants having violated the code of conduct. In this view of the matter, the impugned order cannot be sustained.
In the result, the appeals are allowed and the impugned order set aside. Parties shall bear their own costs.
Sd/-
Justice N. K. Sodhi Presiding Officer Sd/-
Samar Ray Member Sd/-
P.K. Malhotra Member 5.8.2010 Prepared & compared by-ddg