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Securities and Exchange Board of India Versus Kishore R. Ajmera

2016 (2) TMI 723 - SUPREME COURT

Fraudulent/ manipulative practices under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations - What is the degree of proof required to hold brokers/sub-brokers liable for fraudulent/ manipulative practices under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations and/or liable for violating the Code of Conduct specified in .....

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lleged so as to make respondent-broker liable under the Conduct Regulations, 1992 as has been held in the order of the Whole Time Member, SEBI which, according to us, was rightly reversed in appeal by the Securities Appellate Tribunal. - The difference between violation of the Code of Conduct Regulations and the FUTP Regulations would depend on the extent of the persistence on the part of the broker in indulging with transactions of the kind that has occurred in the present cases. Upto an ex .....

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ond the permissible dividing line between negligence and deliberate intention. - Insofar as the plea of violation of principles of natural justice, as raised on behalf of the respondent in C.A.No.282/2014 (Monarch Networth Capital Ltd.) is concerned, we do not think the same to be justified in any manner. The relevant extracts of the trade log which have been perused by us, in view of the clear picture disclosed with regard to the particulars of the offending transactions, must be held to be .....

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s, was definitely not the foundation of the impugned findings recorded by the Whole Time Member of SEBI. The statement of Shirish Shah, even if not furnished to the respondent brokers, would not materially alter the situation inasmuch as it is the liability of the respondent-brokers, on account of their failure to correct the huge irregularities that were going on through their terminals, that was the subject matter of consideration of the Whole Time Member. - The fact that on behalf of the .....

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charges. In the case of M/s Monarch Networth Capital Limited the stage has advanced far beyond the above and had culminated in operative findings against the said subbroker. The imposition of monetary penalty in the case of M/s. Ess Ess Intermediaries Pvt. Ltd., M/s. Rajesh N. Jhaveri and M/s. Rajendra Jayantilal Shah [second category] for violation of the FUTP Regulations cannot be a basis for alteration of the punishment of suspension imposed on M/s. Monarch Networth Capital Limited to one of .....

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rs by the respective orders of the Whole Time Member of the SEBI. - Civil Appeal No. 2818 of 2008, Civil Appeal No. 8769 of 2012, Civil Appeal No. 6719 of 2013, Civil Appeal No. 252 of 2014, Civil Appeal No. 282 of 2014 - Dated:- 23-2-2016 - Ranjan Gogoi And Prafulla C. Pant, JJ. JUDGMENT Ranjan Gogoi, J. 1. The core question of law arising in this group of appeals being similar and the facts involved being largely identical, all the appeals which were heard analogously are being decided by this .....

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(Stock-Brokers and Sub-Brokers) Regulations, 1992? (hereinafter referred to as the Conduct Regulations, 1992 ). 3. At the outset facts of each case on which the above question of law have arisen may be taken specific note of. Civil Appeal No. 2818 of 2008 ( SEBI Vs. Kishore R. Ajmera ) The respondent-Kishore R. Ajmera is a broker registered with the Bombay Stock Exchange. M/s. Prakash Shantilal & Company is one of the sub-brokers through whom the two clients, namely, Mayekar Investments Pvt. .....

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of common family members, had through the subbroker bought 66,300 shares and sold 77,700 shares of MEL during the first period and a total of 32,500 and 28,800 shares of MEL, respectively, during the second period. Not only both the clients were related but they were also beneficiaries of the allotment of the shares made directly by the parent company i.e. MEL. The said allotment incidentally was made out of the shares that were forfeited on account of failure to pay call money by the allottees .....

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ence, lack of due care and caution were levelled against the sub-broker and in turn against the broker. The said charges were found to be proved after holding a due enquiry and by complying with all the procedural requirements under the Securities and Exchange Board of India Act, 1992 (hereinafter for short the SEBI Act ), Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter Code of Conduct Regulations, 1992) and the Securities and Exchange Board .....

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n force) penalty of suspension of registration of the respondent as a broker for a period of four months was ordered. 4. Aggrieved, the respondent filed an appeal before the Securities Appellate Tribunal under Section 15T of the SEBI Act. The aforesaid appeal was answered by the learned Tribunal by order dated 05.02.2008 by holding that in the absence of any direct proof or evidence showing the involvement of the sub-broker in allegedly matching the trades and thereby creating artificial volumes .....

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se appeals is one of M/s. Adani Export Ltd. (AEL) and the period of investigation involved is 09.07.2004 to 14.01.2005 and 08.08.2005 to 09.09.2005. The respondents are all sub brokers who are alleged to have synchronized trades in respect of a huge number of shares during the periods in question. The volume of shares traded during the two periods in questions is best evident from the following extracts of the orders of the Whole Time Member passed in each of the cases. ESS ESS INTERMEDIARIES PV .....

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ades wherein he reversed the trades with particular clients of other brokers. A total trading of 1,29,422 shares was executed by the said client in such manner between July 16, 2004 and July 27, 2004. This quantity accounted for 12.5% of the total traded quantity during this period. It is further observed that during the period between July 28, 2004 to January 14, 2005 the said client is alleged to have entered synchronized trading for buying 83,45,924 shares and selling 87,60,410 shares. The sa .....

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240 shares appear to be synchronized as the buy and sell orders were placed within time gap of 1 minute. Moreover, for 18,38,077 shares buy and sell order quantity and rate identical and placed within a time gap of 1 minute from each other. In case of 116 trades for 2183102 shares the time gap between the buy and sell orders was between 0-10 seconds. The said client's contribution to the alleged manipulation is to the extent of 13,21,582 shares on buy side and 15,04,408 on the sell side. Sim .....

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to July 27, 2004. The said client also entered into structured trades wherein he reversed the trades with particular clients of other brokers. It was observed that during the period between July 28, 2004 to January 14, 2005 the said client is alleged to have entered synchronized trading for buying 66,20,117 shares and selling 67,44,545 shares. The said client was part of the group which executed trades of 3,48,53,139 shares during the above period which is around 51% of total traded volumes. Of .....

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p which executed trades of 3,48,53,139 shares during the above period which is around 51% of total traded volumes. Of these trades 3,04,68,762 shares (87.39% of their trades) appear to be synchronized. 6. It is further alleged that in respect of all the transactions buy and sell orders were placed within a time gap of 0 to 60 seconds. The volume of trading in the illiquid scrip being very high and the sequence of the buy and sell orders being in quick succession of time, the respondents have bee .....

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UTP Regulations, 2003 can be established only on the basis of clear, unambiguous and unimpeachable evidence which is not available in the instant case. Accordingly, the penalty imposed under the FUTP regulations had been interfered with by the learned Tribunal while the penalty for violation of the provisions of the Code of Conduct Regulation has been maintained. 8. The learned Tribunal had disposed of two other appeals before it by following the order passed in the case of M/s. Ess Ess Intermed .....

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e the respondent had indulged in circular trading of the scrip on behalf of one Indumati Goda. It is alleged that orders to buy and sell in respect of the scrip were placed by one Shrish Shah on behalf of the client Indumati Goda and such circular trading amongst the 4 brokers continued for a period of 38 days resulting in a huge and voluminous trading in the illiquid shares thereby artificially raising its price in the market. The said allegations, on due enquiry, have been found to be establis .....

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. 10. There are certain relevant facts which have to be taken note of with regard to the present case, at this stage. (i) Circular and synchronized trading per se is not prohibited and in fact is regulated by the SEBI regulations in force. (ii) The client Indumati Goda though required under the relevant norms had not appeared before the respondent at the time of registration for opening an account. The required documents were submitted by one Shri Shirish Shah on his behalf. (iii) Though proceed .....

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nged the penalty imposed. (vi) The modus operandi of the circular trading involved commencement of trading on a particular day by a sale made by one broker to a second and continuation of such sale in a circular manner until at the end of the day the same or substantially the same number of shares would come back to the first broker who had initiated the sale. This went on for 38 days. (vii) The time difference between buy and sell orders was 0 to 60 seconds in most cases. 11. It is on these fac .....

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s been that in an on screen based trading it is not possible for the broker to know who the counter party is at the time the trade is being executed. 12. The further finding of the learned Tribunal in the present case is that though it was urged on behalf of SEBI that trading to the extent (volume) involved in the present case in case of an illiquid scrip is sufficient to indicate gross irregularities and violations, what was ignored is that, the client had been regularly trading in the same fas .....

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tire of the trade log as distinct from the extracts therefrom had not been furnished to the respondent; so also the statements of Smt. Indumati Goda and Shri Shirish Shah and that the same had caused prejudice to the respondent. RELEVANT PROVISIONS OF THE SEBI ACT AND THE REGULATIONS 14. Section 12-A contained in Chapter V-A of the SEBI Act deals with Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control and reads as follows : 12- .....

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e to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder; (d) engage in insider .....

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he regulations made under this Act. 15. Section 15-HA of the Act which deals with penalty for fraudulent and unfair trade practices and Section 15J which lay down the factors to be taken into account while adjudging the quantum of penalty reads as follows : 15-HA. Penalty for fraudulent and unfair trade practices.-If any person indulges in fraudulent and unfair trade practices relating to securities he shall be liable to a penalty of twentyfive crore rupees or three times the amount of profits m .....

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he default. 16. Section 12-A has to be read along with the provisions of FUTP Regulations, 2003, SEBI (Stock-Brokers and Sub- Brokers) Regulations, 1992 and the SEBI (Procedure for Holding Enquiry by Enquiry Officer and imposing Penalty) Regulations, 2002. Regulation 3 and 4 of the FUTP Regulations reads as follows: 3. Prohibition of certain dealings in securities. -No person shall directly or indirectly- (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in .....

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which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognised stock exchange in contravention of the provisions of the Act or the rules and the regulations made thereunder: 4. Prohibition of manipulative, fraudulent and unfair trade practices.-(1) Without prejudice to the provisions of Regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securiti .....

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rue or which he does not believe to be true prior to or in the course of dealing in securities; (g)-(j) * * * (k) an advertisement that is misleading or that contains information in a distorted manner and which may influence the decision of the investors; (l)-(q) * * * (r) planting false or misleading news which may induce sale or purchase of securities. Regulation 12 of the FUTP Regulation also contemplates suspension or cancellation of registration of intermediaries. For the sake of brevity th .....

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) Exercise of due skill and care : A stock-broker shall act with due skill, care and diligence in the conduct of all his business. (3) Manipulation : A stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains. (4) Malpractices: A stock-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors interest .....

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uct for Stock Brokers, inter alia, lays down that the stock-broker shall maintain high standards of integrity, promptitude and fairness in the conduct of all investment business and shall act with due skill, care and diligence in the conduct of all investment business. The code also enumerates different shades of the duties of a stockbroker towards the investor, details of which are not being extracted herein except to say that all such duties pertain to the high standards of integrity that the .....

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ny one or more of the following actions- (i) Monetary penalty under Chapter VIA of the Act. (ii) Penalties as specified under 59[Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008] including suspension or cancellation of certificate of registration as a stock broker or a subbroker, (iii) Prosecution under section 24 of the Act. LIABLE FOR MONETARY PENALTY 26. A stock broker or a sub-broker shall be liable for monetary penalty in respect of the following vi .....

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mposition of penalty on determination of liability either for manipulative or fraudulent practices or for violation of the Code of Conduct Regulation, 1992. The different Regulations including the Regulations that prescribe the procedural course, namely, SEBI (Procedure for Holding Enquiry by Enquiry Officer and imposing Penalty) Regulations 2002 and the successor Regulation i.e. SEBI (Intermediaries) Regulations 2008 contain identical and parallel provisions with regard to imposition of penalty .....

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y. Investors' confidence in the Capital/Securities Market is a reflection of the effectiveness of the regulatory mechanism in force. All such measures are intended to preempt manipulative trading and check all kinds of impermissible conduct in order to boost the investors' confidence in the Capital market. The primary purpose of the statutory enactments is to provide an environment conductive to increased participation and investment in the securities market which is vital to the growth .....

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velled. While direct evidence is a more certain basis to come to a conclusion, yet, in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a concl .....

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missible, yet, voluminous trading over a period of time in such scrips is a fact that should attract the attention of a vigilant trader engaged/engaging in such trades. The above would stand fortified by the note of caution issued by the Bombay Stock Exchange in the form of a notice/memorandum alerting its members with regard to the necessity of exercising care and caution in case of high volume of trading in illiquid scrips, as already noted. 24. Insofar as first case (C.A. No.2818 of 2008 SEBI .....

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e or bona fides on the part of the subbroker so as to make respondent-broker liable. An irresistible or irreversible inference of negligence/lack of due care etc., in our considered view, is not established even on proof of the primary facts alleged so as to make respondent-broker liable under the Conduct Regulations, 1992 as has been held in the order of the Whole Time Member, SEBI which, according to us, was rightly reversed in appeal by the Securities Appellate Tribunal. 25. This will take us .....

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n respect of the transactions were made within a span of 0 to 60 seconds. While the said fact by itself i.e. proximity of time between the buy and sell orders may not be conclusive in an isolated case such an event in a situation where there is a huge volume of trading can reasonably point to some kind of a fraudulent/manipulative exercise with prior meeting of minds. Such meeting of minds so as to attract the liability of the broker/sub-broker may be between the broker/sub-broker and the client .....

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pecifically taken note of herein that the trades in question were not negotiated trades executed in accordance with the terms of the Board s Circulars issued from time to time. A negotiated trade, it is clarified, invokes consensual bargaining involving synchronizing of buy and sell orders which will result in matching thereof but only as per permissible parameters which are programmed accordingly. 26. It has been vehemently argued before us that on a screen based trading the identity of the 2nd .....

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preponderance of probabilities so far as adjudication of civil liability arising out of violation of the Act or the provisions of the Regulations framed thereunder is concerned. Prosecution under Section 24 of the Act for violation of the provisions of any of the Regulations, of course, has to be on the basis of proof beyond reasonable doubt. The conclusion has to be gathered from various circumstances like that volume of the trade effected; the period of persistence in trading in the particular .....

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ld raise a serious doubt in a reasonable man as to whether the trades are genuine. The failure of the brokers/sub-brokers to alert themselves to this minimum requirement and their persistence in trading in the particular scrip either over a long period of time or in respect of huge volumes thereof, in our considered view, would not only disclose negligence and lack of due care and caution but would also demonstrate a deliberate intention to indulge in trading beyond the forbidden limits thereby .....

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e intention to play the market. The dividing line has to be drawn on the basis of the volume of the transactions and the period of time that the same were indulged in. In the present cases it is clear from all these surrounding facts and circumstances that there has been transgressions by the respondents beyond the permissible dividing line between negligence and deliberate intention. 27. Insofar as the plea of violation of principles of natural justice, as raised on behalf of the respondent in .....

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ular feature all along. Insofar as the statement of Indumati Gowda is concerned, it is the stand of the SEBI that the same was not relied upon to come to the impugned conclusions and findings. The statement of Shirish Shah, who admittedly was behind the manipulative practices in question through the brokers, was definitely not the foundation of the impugned findings recorded by the Whole Time Member of SEBI. The statement of Shirish Shah, even if not furnished to the respondent brokers, would no .....

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case of the scrip involved in which the respondent Monarch Networth Capital Limited had indulged in. 29. There is yet another argument advanced on behalf of the respondent - Monarch Networth Capital Limited, namely, that two of the brokers who were allegedly involved in circular trading were let off with monetary penalty. It is also argued that in case of M/s Ess Ess Intermediaries Pvt. Ltd., M/s Rajesh N. Jhaveri and M/s Rajendra Jayantilal Shah [second category] monetary penalty has been impos .....

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