Securities Appellate Tribunal
Swadha Securities Pvt. Ltd. vs Chairman, Securities And Exchange ... on 21 March, 2005
Equivalent citations: [2005]62SCL562(SAT)
JUDGMENT
Kumar Rajaratnam, J. (Presiding Officer)
1. The appeal was taken up with the consent of both parties.
2. This appeal is against the order dated 27th January, 2005 of the Chairman, Securities & Exchange Board of India, the Respondent which interalia reads as under:
"I am satisfied that this is a fit case to impose penalty of suspension and I do not see any reason to differ with the findings and the recommendation of the Enquiry Officer in this regard. I am also convinced that a major penalty of suspension of the Certificate of Registration of the said broker for a period of six months would be adequate and commensurate with the Gravity of the violations committed by the said broker.
Order "Therefore, in exercise of powers conferred upon me by virtue of Section 4(3) of the Securities and Exchange Board of India Act, 1992, read with regulation 13(4) of the Enquiry Regulations, hereby suspend the certificate of registration of M/s. Swadha Securities Limited (SEBI Registration No.INB031141238) for a period of six months.
This Order shall come into effect on the expiry of twenty one days From the date of this Order."
3. The brief facts of the case is that the appellant M/s. Swadha Securities Pvt. Ltd., (SSL) is a Member of Calcutta Stock Exchange (CSE) and is registered with the Securities and Exchange Board of India vide Registration No.INB031141238.
4. The appellant is a private limited company incorporated on 16th March, 2000 and commenced business as a member of CSE on 29th November, 2000. The appellant has two professional directors on their Board. The appellant has stated that the appellant maintained a high standard of the integrity, promptitude and fairness in the conduct of its business. They also maintained close co-ordination with the CSE and followed their advice and guidelines regularly.
5. The appellant has also submitted that all their clients are duly registered with them and they entered into genuine trade transactions on behalf of their clients without having any deceptive trade practices. They have also not done any act, which would have jeopardized the safety and integrity of the market. The appellant also submitted that they have not received any investors' complaints till date in respect of any of their dealings. They claim that they are one of the best managed and disciplined brokers of the Exchange.
6. The appellant has stated that while doing saudas they specially ensure that they do not violate any law and they comply with all the formalities as laid down by CSE and SEBI, the Respondent. They have always provided the information and details sought by the various authorities and exchange and also complied with the enquiries and investigation proceedings that were held and extended all co-operation to the officers concerned. They have paid all their dues to SEBI and there is no amount outstanding as on date.
7. The appellant has also submitted that they have never encouraged sale or purchase of securities with the sole objective of generating brokerage. In fact the amount of formalities and legalities they asked their clients to comply, with before starting trade at times makes their clients shift to another broker. The volume done by them on a daily basis is nothing compared to overall volume of the exchange. They pay margins on all trades done through them and sometimes it is as high as 100%. The appellant claims that during their 4 years of operation they have never violated in their margin and pay-in obligations.
8. The shares of Offshore Finvest Limited (OFL) were .listed on CSE and there was a spurt in price and volumes traded at CSE during the period July and October, 2001. An investigation was conducted by the Respondent and it was observed that between July 2001 and October, 2001 the price of the scrip of OFL at CSE shot up from Rs/15.70 to Rs.70.40 along with increase in volumes also. On the basis of the investigation, the Respondent appointed an Enquiry Officer to enquire into the irregularities/contravention alleged to have been committed by the Appellant while dealing in the scrip of OFL. The enquiry officer after conducting the enquiry submitted a report dated 21st July, 2004 and recommended a major penalty of suspension of Certificate of Registration for a period of 6 months against the Appellant
9. After getting the show cause notice dated 30th July, 2004 the appellant responded to the same vide their letter dated 31st August, 2004. The Appellant also appeared before the SEBI chairman and denied all charges made by the Enquiry officer and also gave a written submission making a humble request to drop all charges levied against it.
10. The appellant has denied having violated any provisions of regulations 4(a)(b)(c) & (d) of the PFUTP Regulations and also any provisions of the regulation 7 of the said regulations read with Clauses A(1), A(2), A(3) A(5) and B94)(a) of Code of Conduct prescribed for the stock brokers under Schedule II of the said Regulations.
11. The appellant has submitted that they had obtained a separate declaration from each client stating that they do not have any link directly or indirectly with the promoter of the company and also they are nowhere involved with the increase or decrease in the price of shares dealt in by them through the appellant.
12. The appellant submitted that the price of "OFL" increased from Rs.15/- to Rs.71.40 but the appellant did not have any transactions between the periods with price increase was maximum i.e. from Rs.15.70 to Rs.50.95 i.e. when price increased by 224.52%. Whatever Sauda done by the appellant on behalf their client were during the period from 27-8-2001 to 12-10-2001 i.e. spread over 32 working days. The price increase during this period was from Rs.52/- to Rs.70.40 (i.e. the price increased by only 35.38% in 32 working days). Thus there has been an average increase of only 58 paise per working day and whatever they have done it was as per instructions of their clients.
12. The appellant further submitted that they have never paid, offered, or agreed to pay or offered directly or indirectly any money to any person for dealing in any security with the object of inflating, depressing, maintaining or causing fluctuation in the price of such security. So there was no intention of appellant to manipulate and increase the price of securities.
13. In this connection the appellant has submitted an affidavit the extract of which is as follows:
14. "That the appellant have filed the above appeal against the Order dated 27th January, 2005 passed by the Respondents ("the Impugned Order"). By an order dated 15th February, 2005 this Hon'ble Tribunal was pleased to stay the implementation and operation of the said Impugned Order for a period of 4 weeks. The said Impugned Order has been further extended for 2 weeks by an order dated 16th March, 2005. I crave leave to refer to and rely upon the said Orders passed by this Hon'ble Tribunal in the above matter, when produced.
15. That the appellant is a private limited company incorporated on 16th March, 2000 and commenced business as a member of CSE on 29th November, 2000. It has four Directors on its Board out of which two are professionally qualified. That the Appellant, a stock broker is a Member of Calcutta Stock Exchange (CSE) and is registered with the Securities and Exchange Board of India vide Registration No.INB031141238. The appellant has always maintained a high standard of the integrity, promptitude and fairness in the conduct of all its business. It maintains close co-ordination with the CSE and followed their advice and guidelines regularly.
16. That while doing saudas the Appellant especially ensured that they do not violate any law and comply with all the formalities as laid down by CSE and SEBI, the Respondent. They have always provided the information and details sought by the various authorities and exchange and also complied with the enquiries and investigation proceedings that were held and extended all co-operation to the officers concerned. They never tried to shun their responsibilities and have even paid all their dues to SEBI and there is no amount outstanding as on date.
17. That the Appellant dealt in shares listed in CSEA and also dealt in shares of Offshore Finvest Limited (OFL) There was a spurt in price and volumes traded at CSE during the period July and October, 2001. That an investigation was conducted by the Respondent and it was observed that between July 2001 and October, 2001 the price of the scrip of OFL at CSE shot up from Rs.15.70 to Rs.70.40 along with increase in volumes also. On the basis of the investigation, the Respondent appointed an Enquiry Officer to enquire into the irregularities/contravention alleged to have been committed by the said Broker while dealing in the scrip of OFL. The enquiry officer after conducting the enquiry submitted a report dated 21st July, 2004 and recommended a major penalty of suspension of Certificate of Registration for a period of 6 months against the Appellant. After getting the show-case notice dated 30th July, 2004, the Appellant responded to the same vide letter dated 30th August, 2004 and submitted the following facts:
i. That it had no role what-so-ever in increasing the price of "OFL" From Rs.15.70 to Rs.70.40.
ii. That it did not execute any trade when the price increase was Maximum (from Rs.15.70 to Rs.50.90) iii. That the price increase during the period of 32 working days (27th August, 2001 to 12th October, 2001) when "SSPL" made trade was only from Rs.52 to Rs.70.40. The average price increase per working day during those 32 working days is negligible (only 58 paise) iv. That it had obtained "Know Your Client" Forms and "Member-client-Agreement" and allotted a unique code to each client before executing any trade.
v. That all the trades were done in the respective codes of clients only and none of the trades were done in self code.
vi. That in case of transactions where buyers and sellers were its clients, delivery has been made to all the buyers of securities and deliveries were received from all the sellers of securities through their pool/beneficiary account and hence there was transfer of beneficial ownership for all trades done by the clients.
18. That the Appellant appeared before the SEBI chairman and denied all charges made by the Enquiry Officer and also gave a written submission making a humble request to drop all charges levied against it. That The Chairman, SEBI relied fully on the report of his Enquiry Officer and confirmed his recommendation without giving any consideration to our submissions and explanation made to him personally.
19. That the appellant company have made every endeavor and is taking all possible care and caution to carry on its share and stock broking business in accordance with the statutory requirements. Further, all the infractions and lapses, if any, have been removed by the Appellant Company and it has taken every care to ensure that no further technical lapses occur in their business.
That I further state that any adverse order passed by the Tribunal will cause irreparable harm, loss and injury to the reputation and standing of the Appellant and will result a civil death of the Appellant. The whole business of the Appellant will collapse and its employees will loose their jobs and consequently their daily livelihood. The Appellant begs to give the details of business as on 28th February, 2005 as under:
1. No. of person employed: 52. No. of Registered clients : Over 2000 till date.
3. Average Monthly Turnover: Rs.439 Lacs (Approx.) during the year 2004-05.
4. Infrastructure: The Company has its Registered Office at B-56, Shantiniketan, 8., Camac Street, Kolkata - 700 017, which is fully furnished along with two telephone lines. It has a rented office at Commerce House, Room no.5, 9th Floor, 2A Ganesh Chandra Avenue, Kolkata - 700 013 for Its trading activities. The said office Is also fully furnished and equipped with telephones, fax, EPABX, airconditioners, Computers etc
20. That in view of the above circumstances, the Appellant Company further assures this Hon'ble Tribunal that it will take all possible care and caution to ensure that its broking business is being done in accordance with the laws, bye-laws, rules and regulations of the Exchange and the Respondent."
21. The appellant has also submitted that they had placed all orders in electronic trading mechanism of the stock exchange purely on behalf of their clients without any malafide intention of creating artificial price and volume in the scrip of "OFL". All their transactions have been effected through placement or orders in the ordinary course of business in the screen based online trading system.
22. The appellant has further submitted that in many cases both buyers and sellers were their clients. It is, therefore, natural that buy and sell orders entered through their terminal and at times the difference between these transactions were very less. However, since all transactions were done on behalf of the clients on their code at the market price and on a declaration that they were nowhere involved in either the increase of the price or with the promoters and also since buyers and sellers were not known to each other it cannot be said that these transactions were done to artificially increase the volume. Also none of the transactions were done to mislead any genuine investors.
23. The appellant also submitted that they have not received any investor complaint till date in respect of their dealings. They have also not received any complaint from any authority like CSE, SEBI etc. indicating that they have misled the customers who have incurred loss due to dealing in the scrip. Hence the appellant pleaded that they have not violated clause 4(b) and 3(c) of PFUTP Regulations."
24. The appellant submitted that they have done all saudas in Demat form and in electronic trading mechanism. In case of transactions where buyers and sellers were their clients, delivery has been made to all the buyers of securities and deliveries were received from all sellers of securities through their pool/beneficiary account.
25. The learned Counsel for the Respondent submitted that between July 2001 and October, 2001, the appellant along with other brokers of CSE generated maximum volumes in in the scrip of OFL. In all, 15,49,400 shares of OFL were traded at CSE during the said period and the appellant had transacted in 10,64,400 shares between settlement No.20002123 to 20002129 constituting 68.67% of the volume at CSE. The entire volumes of transactions were executed by way of matching transactions by which the order quantity, price and time were matched with both the buying and selling clients belonging to the appellant. The cross deals were executed through the same terminal. The Respondent has identified a long list of such transactions done by the appellant.
26. In view of the above the Respondent observed that the long transactions mentioned above were cross deals wherein both buyers and sellers were of the appellant. The orders were also executed through the same terminal. The ordered quantity, price and time were matched and there was no delivery obligations to the exchange. From the long list of transactions the Respondent has observed that the appellant has transacted in the scrip by way of matching cross deals from 27.08.01 to 12.10.2001 when the price had shot up from Rs.52/- to Rs.70.40.
27. The Respondent has also found that the time lag between the punching of buy and sell orders was a few minutes/seconds and almost the same in a number of transactions. In other words the Respondent has indicated that there was thin line between the punching of buy and sell orders and the number of transactions entered into.
28. The average price of the scrip of OFL increased sharply from Rs.15.70 to Rs.50.95 an increase of more than 218.75% in settlement No.2002117 and 2002121. Further price increased to Rs.70.50 an increase of more than 40% in settlement No.2002127 along with increase in volumes. In respondent's view the value and volume of the impugned transactions were also quite high.
29. The Respondent has quoted this Tribunals observation in Appeal No.54 of 2002 - Nirmal Bang Securities Pvt. Ltd. v. SEBI as under:
"BEB has been charged for synchronized deals with First Global. I have examined the data provided by the parties on this issue. I find many transactions between BEB and FGSB. There are many instances of such transactions. I find the scrip, quantity and price for these orders had been synchronized by the counter party brokers. Such transactions undoubtedly create an artificial market to mislead the genuine investors. Synchronized trading is violative of all prudential and transparent norms of trading in securities. Synchronized trading on a large scale, can create false volumes. The argument that the parties had no means of knowing whether any entity controlled by the client is simultaneously entering any contra order elsewhere for the reason that in the online trading system, confidentiality of counter parties is ensured, is untenable. It was submitted by the Appellants that it was not possible for the broker to know who the counter party broker is and that trades were not synchronized but it was only coincidence in some cases. Theoretically this is OK. But when parties decide to synchronize the transaction the story is different. There are many transactions giving an impression that these were all synchronized, otherwise there was no possibility of such perfect matching of quantity price etc. As the Respondent rightly stated it is too much of a coincidence over too long a period in too many transactions when both parties to the transaction had entered buy and sell orders for the same quantity of shares almost simultaneously."
30. Regulation 4 of the PFUTP Regulations reads as nder:
No person shall -
(a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities, and thereby inducing the sale or purchase of securities by any person;
(b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market;
(c) indulge in any act, which results in reflection of prices of securities based on transactions that are not genuine trade transactions;
(d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the market price of securities;
31. It is also submitted that the Respondent as well as the Tribunal have taken a lenient view of similar acts to rehabilitate the broker considering that it is a first time offence.
32. The learned counsel for the appellant referred to a few cases namely M/s. Bakliwala Investment, J.M. Morgan Stanley Retail Services Pvt. Ltd., Bama Securities as under, which have been found to contain by and large similar irregularities and have been only served with a letter of warning by SEBI.
a) M/s. Bakliwala Investment Irregularities
- Provision for Tax for the interim period from April 1 to September 30, 2000 not made
- Confirmations have not been obtained from Banks, Creditors and debtors by the broker.
- Broker had not time stamped the order slip/records
- Contract notes not serially numbered except for computer generated numbers on day-to-day basis which have no control.
- Contract notes not issued within the specified time.
- Consolidated stamp duty not paid.
- Client Registration forms were not completed
- Order book was not maintained.
- Delay in payment of funds
- Delay in delivery of securities
- One client account being adjusted against another client without any authorization
- Transactions with associate firms/companies separate set of ledger accounts as clients and others not maintained.
- Compliant register not maintained.
- Client account were used for other purposes
- Margin money not collected
- In 10 cases, deals were done outside the NEAT System Order
- Irregularities are basically technical lapses and do not deserve a substantive punishment.
- Minor Penalty - Warning
b) M/s. J.M. Morgan Stanley Retail Services Pvt. Ltd.
Irregularities
- Failure to obtain client registration forms and agreement
- Failed to maintain separate client account.
Order Warning
c) M/s. Bama Securities Irregularities
- Contract notes were missing
- Acknowledgement from the clients not obtained
- Not maintaining client registration forms Order Warning
2. Reliance has been placed on a few other judgments as under in which similar irregularities were found and were served with a letter of warning.
a) M/s. Ratanbali Capital Markets Ltd.
Irregularities
- Non-maintenance of books of accounts
- Contract notes
- Non-collection of margins from clients
- Misuse of client's funds
- Share lending/borrowing
- Non-segregation of clients accounts with own account and for not reporting off-the-floor transactions to Stock Exchange Order Warning
b) M/s. Twenty First Century Shares & Securities Ltd.
Irregularities
- Non-maintenance of books of accounts
- Delay in payment to clients
- Misuse of client's funds
- Non-segregation of clients accounts with own account and for not reporting off-the floor transactions to Stock Exchange
- Booking payment in different clients account.
- Loan against shares of holding company and loan transaction in clients account.
Order Warning
c) M/s. Sanjay C. Bakshi Irregularities
- Not maintaining margin registers
- Dealing with unregistered sub-brokers
- Not entering into agreement with few clients
- Non-segregation of clients funds with own funds
- Dealing with broker of other Stock exchange without getting registered as a sub-broker
- Irregularities in respect of contract notes
- Delay in payment/delivery of funds/shares to clients Order Warning
d) M/s. Mahesh Kothari Share & Stock Brokers Pvt. Ltd.
Irregularities
- Non-maintenance of books of accounts
- Dealing with unregistered sub-brokers
- Irregularities in issuance of contract notes
- Non-segregation of clients account with own account, misuse of client's fund
- Delay on delivery of securities and not reporting off the floor transactions Order Warning
e) M/s. Mukesh Sawhany Irregularities
- Non-maintenance of document registers
- Irregularities in issuance of contract notes
- Non-maintenance of separate client account
- Non-segregation of separate client account with own account
- Not reporting off the floor transactions
- Non redressal of investor complaints Order Warning
32. In fact and circumstances of the case, the order of the Respondent is modified to the extent that there will be a suspension of the certificate of registration of the appellant for a period of 7 days. The order is modified accordingly.
No order as costs.