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2016 (2) TMI 723 - SUPREME COURT

2016 (2) TMI 723 - SUPREME COURT - TMI - 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 v .....

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shed 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.

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 .....

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has been transgressions by the respondents beyond 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 particular .....

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nipulative 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 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 .....

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of liability of the said two brokers who did not contest the 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 suspensio .....

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restore the orders and penalty imposed on the respondents - brokers 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 .....

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d with Regulation 9 of the Securities and Exchange Board of India (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-brok .....

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e related to each other through majority shareholding in the hands 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 .....

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-Kishore R. Ajmera. It is on the said facts that charges of negligence, 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 .....

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Enquiry Officer and Imposing Penalty) Regulations, 2002 (as then in 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 all .....

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014 (SEBI Vs. M/s. Rajesh N. Jhaveri) 5. The scrip involved in these 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 .....

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for 52,910 shares. The said client also entered into structured trades 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 tradin .....

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few other entities traded in a manner such that orders for 28,22,240 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 o .....

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des for 1,17,601 shares of AEL during the period from July 9, 2004 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 durin .....

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uly 9, 2004 to July 27, 2004. 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 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 .....

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.2013 had taken the view that the allegations of fraud under the FUTP 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 .....

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t alongwith three other member brokers of the Bombay Stock Exchange 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. Th .....

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2012 giving rise to the instant appeal at the instance of the SEBI. 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 subm .....

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oker in respect of whom suspension has been ordered has not challenged 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 sel .....

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e learned Tribunal in all the cases, including the present one, has 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 igno .....

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tural justice had been violated on account of the fact that the entire 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 substanti .....

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ulations made thereunder; (b) employ any device, scheme or artifice 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 t .....

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to be listed on a recognised stock exchange in contravention of the 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 .....

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vestors as a result of the default; (c) the respective nature of the 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 otherwis .....

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ock exchange; (d) engage in any act, practice, course of business 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 sha .....

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t by a person dealing in securities any information which is not true 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 cancella .....

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y, promptitude and fairness in the conduct of all his business. (2) 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 o .....

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rom time to time as may be applicable to him. 18. The Code of Conduct 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 al .....

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Act, rules or regulations framed thereunder shall be liable for any 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 s .....

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ed to above. This is particularly in the context of the power of imposition 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 iden .....

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antial growth in tune with the parallel developments in the economy. 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 .....

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and circumstances surrounding the allegations/charges made and levelled. 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 proc .....

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s correct that trading in such illiquid scrips is per se not impermissible, 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 a .....

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e above there is no other material to hold either lack of vigilance 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 .....

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alleged and reasonably established, is that buy and sell orders in 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 bro .....

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tural rise in hiking the price/value of the scrip(s). It must be specifically 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 argue .....

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arely be forthcoming. The test, in our considered view, is one of 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 trad .....

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ayment and the volume of trading in the illiquid scrips, all, should 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 in .....

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aution. Beyond the same, persistent trading would show a deliberate 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 princi .....

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ondents that such trading in the scrips in question had been a regular 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 Shiri .....

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ularities can hardly be a ground to overlook what has happened in 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 .....

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