Securities Appellate Tribunal
Knc Shares & Securities Pvt. Ltd. vs Sebi on 7 September, 2010
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 39 of 2009
Date of Decision: 7.9.2010
KNC Shares & Securities Pvt. Ltd.
406, Stock Exchange Towers,
Dalal Street,
Mumbai- 400 023 ......Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra Kurla Complex,
Mumbai- 400 051 ...... Respondent
Mr. Zal T. Andhyarujina, Advocate with Mr. A. A. Mukri, Advocate for the Appellant. Dr. Poornima Advani, Advocate with Mr. Samir Shaikh, Advocate 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) The appellant before us is a stock broker and a member of the Bombay Stock Exchange, Mumbai and registered with the Securities and Exchange Board of India (for short the Board). It traded on behalf of its clients in the scrip of M/s. SOFTBPO Global Services Limited (hereinafter called the company). The Board carried out investigations into the trading in the scrip for the period from May 14, 2004 to March 29, 2005. Investigations revealed that the appellant created artificial demand for the shares of the company by continuously placing buy orders at higher price and thereby created an artificial price rise in the market which resulted in increase in the price of the scrip. It also transpired that the appellant was continuously placing orders even before the start of the trading sessions and most of the orders placed had been rejected by the exchange mechanism from which it was sought to be inferred that the appellant was interested in increasing the price of the scrip. The Board also found that since the orders placed by the appellant were getting cancelled, it failed to exercise due care and diligence as a broker. On the conclusion of the investigations, the appellant was served with a show cause notice dated October 3, 2007 in which the following three charges were leveled:- 2
(i) By continuously placing buy orders at a higher price, the appellant created artificial price rise in the market thereby violating Regulation 4 of the (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (for short FUTP Regulations).
(ii) Since most of the orders placed before the start of the trading sessions had been rejected by the exchange mechanism, it is alleged that the appellant was interested in increasing the price of the scrip of the company.
(iii) Inspite of being aware that the orders placed by the appellant were being cancelled, it continued to put in buy orders on behalf of its clients and from this fact it is alleged that the appellant failed to exercise due care and diligence as a broker and thereby violated different sub clauses of clause A of the code of conduct prescribed in Schedule II to the Securities and Exchange Board of India (Stock-Brokers and Sub-Brokers) Regulations, 1992.
The appellant was called upon to show cause why penalty be not imposed on it under Sections 15HA and 15HB of the Securities and Exchange Board of India Act, 1992. It filed a detailed reply to the show cause notice. While denying all the allegations the appellant gave the following justification/ reasons before the adjudicating officer for continuously putting in buy orders at a higher price.
"(c) Our clients have put purchase order at higher rate due to non availability of shares and not due to increase the price of the scrip.
It is not possible to know the fair rate of any scrip since no fixed parameters are there to judge the same. We explained that what could be the motive to increase the price of the scrip since our clients were not holding any shares and they would not have benefited due to the increase in price. They were not indulged with the company and not associated with management of the company, so why they would be interested to increase the price.
(d) We have informed you that our client, Joban Shah wanted to purchase 2000 shares and wanted to invest approx Rs. 50,000 in this scrip. We also pointed out from your own report that he entered first order on 18.05.2004 at Rs. 18.24 and he used to put the order at the same rate till 06.07.2004 but he did not get any shares. Then only he increased the price to Rs. 21.80 on 06.08.2004 (after 2 and half month). Upto 25.08.2004, he did not increase the price but again he had to increase the price on 26.8.2004 to 26.15 in order to get the shares. Upto 17.09.2004, he used to put order at same rate but he did not receive any shares and hence he increased the price to Rs. 31.65 on 20.09.2004. Same way he used to put the order for few days and since he was not getting any shares he had to increase the price. At last on 08.11.2004, he could purchase 50 shares at the rate of Rs. 45.10 and on 09.11.2004, 50 shares at Rs.54.10. Moreover it was necessary to put order at higher rate since he was not able to get the shares at lower rate.
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(e) However, even after purchase of the shares, he did not get the delivery of shares from clearing system of the exchange and the transaction was closed out at even higher rate by the exchange. If he had received the delivery of the shares, he would not have placed any further order but all the time the transactions used to close out at higher rate and he did not get any shares, there was no alternate but to purchase the shares at higher rate. If you consider the close out rate then even at higher rate, he was not paying more than he wanted to pay for the shares.
(f) Regarding the purchase order at higher rate and before starting of the market, we explained you that client was not able to get the shares at lower rate and hence there was no alternate but to bid the same at higher rate and in order to get the preference over other buyers, client wanted to place his order as earlier as possible and he was used to try to put order at the time of opening of market but there can be difference in his watch and exchange's watch and hence orders might have been placed before the opening of market but the same were cancelled by the system. Once order was accepted, he never used to amend the order since he genuinely wanted to buy the shares but since seller party did not deliver the shares and exchange has closed out the transactions all the times, he has been deprived of becoming shares holder of the company in which he wanted to buy."
On a consideration of the entire material collected during the course of the investigations and the enquiry and taking note of the reply filed by the appellant, the adjudicating officer came to the conclusion that all the three charges levelled against the appellant stood established and accordingly, by his order dated August 29, 2008 imposed a consolidated monetary penalty of ` 6 lacs on the appellant. 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 and are of the view that the appeal deserves to succeed. Before we deal with the charges levelled against the appellant, it is necessary to refer to the shareholding pattern of the company. The total paid up share capital of the company as on March 31, 2004 was `15 lacs comprising 1,50,000 shares of `10 each. The promoters held 1,33,490 shares comprising of 88.9 % of the total paid up share capital of the company and another 1280 shares were held by persons acting in concert with the promoters. In other words, the total share capital held by the promoters and persons acting in concert with the promoters was 89.75%. The remaining share capital was held by the private corporate bodies and the public. It is common case of the parties that the private corporate bodies held 14230 shares and only 1,000 shares were with the public. It is, thus, clear that the floating stock of the company comprises of only 15,230 shares that were available for trading in the market which is a very low quantity. It is not in dispute 4 that the screen based trading system of the exchange processes the buy and sell orders according to its own programme and all such orders match subject to price time priority which is also known as the price and order matching mechanism of the exchange. The price which the system discovers is based on a free play of the forces of demand and supply and where the supply is less and the demand is more, the price of the scrip is bound to go up. Where the supply increases and the demand is less, the price is bound to fall, other things remaining the same. This is how the price discovery mechanism of the system works and the price which the system determines is truly the price which a willing buyer would pay to a willing seller. It is in this background that we shall now examine the charges levelled against the appellant.
3. The first charge pertains to the creation of artificial demand for the shares of the company. This demand, according to the Board, was created by the appellant by continuously placing buy orders at a higher price thereby increasing the price of the scrip. We have gone through the trade logs and the order logs which have been placed before us by the respondent Board. It is common case of the parties that the appellant had placed 4504 buy orders into the system out of which 4247 orders had been rejected. We are not really concerned with the reasons for such rejection and the fact is that 257 buy orders fructified into 37 trades only in 33 days of trading during the investigation period. It is true that the buy orders placed by the appellant which fructified in trades had actually increased the price of the scrip but this fact alone cannot impel us to conclude that the appellant was manipulating the price upwards. Apart from the appellant, there were several other brokers as well who were trading in the market in the scrip of the company. It is the Board's own case that the floating stock of the company available for trading in the market was very low which obviously means that the demand for the scrip was more and the supply was less. This could not but lead to an increase in the price. It is not the case of the Board that the appellant was acting in collusion with the counter party broker or even with the company in manipulating the price. On the contrary, there is a clear finding recorded in the investigation report that there was no collusion between the appellant and the counter party. In the absence of any such collusion, we do not think that they have manipulated the price. Even if we were to agree with the learned counsel for the Board that a broker could single handedly 5 manipulate the price of the scrip upwards, we cannot, in the circumstances of this case, come to such a conclusion. We could have agreed with her if there had been material on the record to show that there were sell orders pending in the system which were at a lower price than the price offered by the appellant as a buying member. There is no such material on the record nor has any reference been made to it in the impugned order. We cannot, therefore, uphold the findings on the first charge.
4. This brings us to the second charge. As already noticed, the allegation is that the appellant had placed 4504 orders continuously out of which 4247 orders were rejected by the exchange mechanism and in all these cases the charge levelled against the appellant is that it was interested in increasing the price of the scrip by placing continuous buy orders at a higher price. The charge on the face of it cannot stand scrutiny even for a moment. When 4247 orders were not accepted by the system, it is obvious that theses orders did not impact the market. It is common case of the parties that the remaining 257 orders resulted in 37 trades as is clear from the trade logs. These trades were executed on 33 trading days during the investigation period. We are clearly of the view that merely because the appellant placed the orders at a price very close to the upper circuit limit does not ipso-facto lead to conclude that it intended to increase the price. We have dealt with this aspect in detail in M/s. Jagruti Securities Limited vs. Securities and Exchange Board of India Appeal no. 102 of 2006 decided on October 27, 2008 and for the reasons stated therein we cannot uphold the findings on this charge. To be fair to the learned counsel for the Board, we may mention that she did not support the findings on this charge in view of our decision in M/s. Jagruti Securities Limited (supra).
5. The only charge left to be dealt with is the one pertaining to the violation of the code of conduct. The charge reads as under:
" It is also alleged in the investigation report that by placing continuous buy orders in spite of being aware that your orders were getting cancelled, you failed to exercise due care and diligence as a broker. It is also alleged that orders placed by your sub-brokers were placed from your office only. The above actions were in violation of Clause A(1), A(2), A(3), A(4) and A(5) of Code of Conduct prescribed for Stock brokers, in Schedule II under Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. The violations attract penalty under section 15HB of the SEBI Act."6
This charge also on the face on it cannot be upheld. Merely because the system cancelled the orders placed by the appellant does not mean that it failed to exercise due care and diligence as a stock broker. The learned counsel for the respondent Board brought to our notice the following findings in the investigation report:
" From the shareholding pattern, it is observed that the company has very low floating stock of only 15,320 shares. Also, all the selling members failed to deliver shares in pay-in resulting in the closeout of the entire deliverable quantity during the investigation period."
and contended that the orders placed by the appellant which were close to the upper circuit limit had in fact been accepted by the system and trades executed but the traded shares could not be delivered by the selling members which resulted in the closeout of the deliverable quantity by the stock exchange and this, according to her, is a clear case of lack of due care and diligence on the part of the stock broker. According to the learned counsel for the respondent, a prudent broker should have been alerted by the repeated closeouts. We have not been able to find any link between the observations made in the investigation report and the charge levelled in para 4 of the show cause notice. Whatever may have been said in the investigation report, the charge levelled was clear that the orders had been cancelled by the system and this, in our opinion, could not mean that the broker was lacking in due care and diligence. We cannot, therefore, uphold the findings on this charge as well.
For the reasons recorded above, the appeal is allowed and the impugned order set aside. There is no order as to costs.
Sd/-
Justice N.K.Sodhi Presiding Officer Sd/-
Samar Ray Member Sd/-
P.K.Malhotra Member 7.9.2010 pmb Prepared & Compared By: pmb 7