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2010 (10) TMI 1187 - AT - Companies Law

Issues Involved:
1. Whether the appellants aided and abetted their clients in executing non-genuine transactions in the F&O segment of NSE.
2. Whether the appellants misused the stock exchange mechanism in violation of FUTP Regulations and Stock Brokers Regulations.

Summary:

Issue 1: Aiding and Abetting Non-Genuine Transactions
The appellants, comprising stock brokers and a market trader, were accused of aiding and abetting their clients in executing non-genuine transactions in the Futures and Options (F&O) segment of the National Stock Exchange of India Limited (NSE). The Securities and Exchange Board of India (SEBI) alleged that the appellants executed synchronized/matched/reverse trades in violation of Regulations 3(a), 3(b), 3(c), 4(1), 4(2)(a), and 4(2)(b) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (FUTP Regulations) and Regulations 7A(1), (2), (3), and (4) of the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (Stock Brokers Regulations).

The Tribunal found no evidence that the appellants had "aided and abetted" their clients in executing manipulative trades. It was noted that the trades were executed through the exchange mechanism, which provides anonymity, making it impossible for the brokers to know the counter-parties. The Tribunal referred to previous judgments, including *Kasat Securities (P.) Ltd. v. SEBI* and *Kishor R. Ajmera v. SEBI*, which established that brokers cannot be held liable for the actions of their clients unless there is evidence of their knowledge or involvement in the manipulative trades.

Issue 2: Misuse of Stock Exchange Mechanism
The Board alleged that the appellants misused the stock exchange mechanism by executing non-genuine trades that created a false or misleading appearance of trading. The Tribunal, however, found that the trades in question were executed for tax planning purposes and did not violate any rules or manipulate the market. The Tribunal referred to the case of *Rakhi Trading (P.) Ltd. v. SEBI*, where it was held that such trades were not manipulative.

The Tribunal also noted that the appellant brokers had executed a minuscule number of trades in question compared to their overall trading volume and client base, which did not raise any red flags. Additionally, many of the trades were executed directly by the clients through the Internet, over which the brokers had limited control.

Conclusion:
The Tribunal concluded that the appellants did not aid and abet their clients in executing non-genuine transactions and did not misuse the stock exchange mechanism. The charges against the appellants were not established, and the appeals were allowed, setting aside the impugned orders with no order as to costs.

 

 

 

 

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