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Kasat Securities Private Ltd. Versus Securities and Exchange Board of India

2006 (6) TMI 517 - SECURITIES APPELLATE TRIBUNAL, MUMBAI

Dated:- 20-6-2006 - N.K. Sodhi, J. (Presiding Officer), C. Bhattacharya and R.N. Bhardwaj, Members, JJ. JUDGMENT N.K. Sodhi, (Presiding Officer) 1. This order will dispose of two appeals nos. 27 and 28 of 2006 in which common questions of law and fact arise. Since the arguments were addressed in the appeal no. 27 of 2006 the facts are being taken from this case. Learned Counsel for the parties are agreed that the order in appeal no. 27 of 2006 will govern the other case as well. 2. This appeal f .....

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ed to as 'KIL' and 'Bora' respectively) in manipulating the price of the shares of Snowcem India Limited (hereinafter called the "company"). It was also held that the appellant had failed to exercise due skill and care in this regard and that it had failed to collect margins from its clients while trading on their behalf and thereby violated the circulars issued by the Board. The facts giving rise to this appeal lie in a narrow compass and these may first be stated. 3. .....

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any during the period of investigations and that they traded through the appellant as a broker. The investigations further revealed that KIL was trading with the money received by it from the company which in turn was given to Bora to purchase the forfeited shares from the company. KIL is also alleged to have paid all its brokers through whom it had traded in the shares. The investigating officer also found that KIL and Bora who traded through the appellant as a broker had manipulated the price .....

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nd Unfair Trade Practices Relating to Securities Market) Regulations, 1995. The appellant was also called upon to show cause why action be not taken against it for having violated the code of conduct as specified in Schedule II read with Regulation 7 of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992. It was alleged in the show cause notice that the appellant along with its group companies had indulged in manipulative and fraudulent transactions along .....

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ransactions and that it had failed to exercise due skill and care in this regard. On receipt of the enquiry report the Board issued another show cause notice calling upon the appellant to show cause why action as recommended by the enquiry officer be not taken against it. A copy of the enquiry report was sent along with the show cause notice. In this notice the appellant was also called upon to show cause notice why action be not taken against it for not having collected margins from its clients .....

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roker for purchasing shares on behalf of these clients and that it was not aware whether the clients were indulging in circular or fictitious transactions. As regards the allegations regarding non-collection of margins, the appellant pleaded that while selling the scrips on behalf of its clients it had received in advance the securities to be sold with valid transfer documents and therefore it did not feel the necessity of collecting the margins. Reference was made to the circulars issued by the .....

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efore the appellant as a broker failed to exercise due skill and care and diligence while executing the transactions thereby violating the provisions of the code of conduct specified in the prescribed code. The Board also found that the appellant traded heavily on behalf of its two clients, namely, KIL and Bora and that it also traded on its own behalf and since the transactions were structured with a view to rig the market the appellant as a broker must have known that the transactions were fic .....

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he appellant for a period of four months. Hence this appeal. 5. We have heard the learned Counsel for the parties and are of the view that the impugned order cannot be sustained. As already noticed, the appellant had been charged with two irregularities/ illegalities: (i) that it aided and abetted KIL and Bora in executing the manipulative and fraudulent transactions and thereby failed to exercise due skill and care; and (ii) it failed to collect margins from its clients when it traded on their .....

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ent on the price of the securities proposed to be purchased, unless the client already has an equivalent credit with the broker. Member may not, if they so desire, collect such a margin from Financial Institutions, Mutual Funds and FII's. 5. Member brokers shall sell securities on behalf of client only on receipt of a minimum margin of 20 percent on the price of securities proposed to be sold, unless the member has received the securities to be sold with valid transfer documents to his satis .....

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than ₹ 50,000/-. The margin so collected shall be kept separately in the client bank account and utilized for making payment to the clearing house for margin and settlement with respect to that client. 7. A conjoint reading of the aforesaid clauses of the two circulars would make it clear that brokers who buy securities on behalf of their clients should collect margin money of a minimum 20% of the price of the securities proposed to be purchased unless the client already has an equivalent .....

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margins from the clients is primarily to minimize the risk of default and to secure the settlement mechanism of the market in this regard. It is therefore, logical for the Board to provide in the circular that if the entire shares which are to be sold are received by the broker along with valid transfer documents then the margin money need not be collected as there would be no risk in the execution of the transactions. Similarly, in the case of shares being brought by a broker he need not colle .....

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ected. In the case before us the explanation furnished by the appellant that it had received all the shares in advance before they were sold on behalf of the clients along with valid transfer documents has not been controverted in the impugned order and if the appellant had received the securities in advance, surely it was not required to collect the margin money. In this view of the matter the finding recorded by the Board holding the appellant guilty on this count cannot be upheld. 8. This bri .....

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lity of reference. Order date Order Time Order No. B/S TM Name Client Total Vol. Price Trade No. 19990701 10:02:40 199907010007920 S Kasat KIL 25000 52 5538 19990701 10:06:45 199907010020801 B Indraprastha KIL 25000 52 5538 19990701 10:08:58 199907010027353 S Kasat KIL 25000 52 9430 19990701 10:10:19 199907010031406 B Indraprastha KIL 25000 52 9430 19990714 11:54:28 1999070140292012 S Kasat KIL 25000 59 170526 19990714 11:55:57 199907140294821 B Indraprastha KIL 25000 59 170526 19990714 11:56:43 .....

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00 65.3 271879 199990707 14:14:13 1999907070448823 B Triveni KIL 2500 65.3 272749 9. When we look at the aforesaid transactions it is clear that on 01/07/1999 a sell order was placed through the appellant at 10:02:40 hours. The name of the client is KIL on whose behalf the appellant had placed the order. Barely four minutes thereafter a buy order is also fed into the computer on behalf of the same client i.e., KIL through another broker Indraprastha. The buy and sell orders are for the same quan .....

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ched after a gap of four minutes or even longer and the trade could still be described as synchronized or structured. Be that as it may, the buyer and seller are the same. We do not think that the same shares could be bought and sold by the same person. The trades, on the face of it, appear to be fictitious and we shall proceed on that assumption. It is obvious that these trades were executed by the clients and the appellant acted only as a broker. If the appellant knew that the trades were fict .....

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ne where the code number of the broker alone is known and the learned Counsel for the parties are agreed that it is not possible for anyone to ascertain from the screen as to who the clients were. This is really a unique feature of the stock exchange where, unlike other moveable properties, securities are bought and sold between the unknowns through the exchange mechanism without the buyer or seller ever getting to meet. Therefore, it was not possible for the broker to know who the parties were. .....

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that the appellant must have known about the nature of the transactions has observed that the appellant failed to enquire from its clients as to why they were wanting to sell the securities. We do not think that any broker would ask such a question from its clients when he is getting business nor is such a question relevant unless, of course, he suspects some wrong doing for which there has to be some material on the record. The learned Counsel appearing for the Board strenuously urged that the .....

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e Board the appellant had furnished this information regarding the details of the clients. Merely because the appellant traded on behalf of several clients in the scrip of the company would again not lead us to the conclusion that the appellant knew about the nature of the transactions executed by KIL and Bora. We may tend to agree with the learned Counsel for the Board that the appellant was known to the clients on whose behalf it had traded but that again does not fill up the gap. We have peru .....

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