TMI Blog2012 (6) TMI 872X X X X Extracts X X X X X X X X Extracts X X X X ..... istered as a stockbroker with the Board. It had executed trades on behalf of its clients, among others, in the scrip of G. G. Automotive Gears Ltd. (for short the company). The Board carried out investigations in the dealings of the scrip of the company for the period from August 1, 2002 to October 16, 2002 and it found that a group of four member brokers, including the appellant, and their clients traded in the scrip of the company in a circular manner intra day for forty days during the investigation period. The appellant had executed trades on behalf of its client Ms. Indumati Goda. Proceedings were initiated against the brokers and their clients separately around the same time. Show cause notice dated June 5, 2006 was issued to the four brokers including the appellant alleging that the four member brokers and their clients had traded in a circular pattern intra day for forty days during the period of investigation. The brokers and their clients involved in the circular trading alongwith the contribution of each was referred to in the show cause notice in the form of a table which is reproduced hereunder for facility of reference:- S. No. Broke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dated March 16, 2009 calling upon it to show cause as to why the same should not be accepted. The appellant again filed its reply on April 22, 2009 denying the allegation that it was a party to the circular trading. However, the whole time member, after considering the material on record, noted that the appellant had traded in the scrip of the company for its client Ms. Indumati Goda and it aided and abetted the creation of misleading appearance of trading by its clients in the securities market. By his order dated April 19, 2011, the whole time member of the Board held the appellant guilty of violating the provisions of regulation 4 (a), (b), (c) and (d) of the FUTP regulations and also Clause A (1) to (5) of the code of conduct prescribed for the stockbrokers under the stockbrokers regulations and suspended the certificate of registration of the appellant for a period of one month. The appellant challenged the said order before this Tribunal. After hearing learned counsel for the parties at length, the Tribunal, by its order dated June 21, 2011, remanded the matter to the Board for proceeding afresh in the matter. While remanding the matter to the Board, the Tribunal observed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the period of August 01, 2002 to October 16, 2002, the price of the scrip increased from ₹ 23 as on August 01, 2002 to ₹ 115.30 as on October 16, 2002 coupled with steep variation in volumes i.e. from 16,847 shares as on August 01, 2002 to 1,05,776 shares as on September 17, 2002 and from 77,041 shares as on September 18, 2002 to 19,962 shares as on October 16, 2002. b. A group consisting of four brokers including you, Unique Stockbro Pvt. Limited (Unique), DPS Shares and Securities Pvt. Limited (DPS) and Action Financial Services (I) Limited (Action) were found trading intra-day for 40 days in circular manner which contributed to an unusual spurt in the traded volumes of the scrip of GGAGL during the relevant period. The shares were being rotated in a circular manner among the group of said brokers. c. The total volume generated by way of such circular trades by the said group of four brokers, was 4,28,749 shares i.e., about 19% of the total quantity of the shares traded during the period of investigation. The total number of shares bought and sold among the said four brokers is same i.e. 4,28,749 shares. Out of this you had purchased 1,11,250 shares and sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and issued a fresh show cause notice. It was also stated by the appellant that in the enquiry report there is only one reference to Shirish Shah which states that Shirish Shah, remisier of Unique (another broker) had fraudulently traded on behalf of Ms. Indumati Goda and her daughter in law Ms. Trusha Goda. In paragraph 3 of the fresh show cause notice, reproduced above, the allegation of fraud has been pleaded but no material/particulars or details of the fraud have been provided as to how and in what manner Shirish Shah had committed fraud on Indumati Goda and on her daughter in law and how the appellant is connected to the fraud committed by Shirish Shah. The appellant again reiterated its request for furnishing copies of the order / trade logs and also sought permission to cross-examine Indumati Goda. The whole time member of the Board, after considering the material on record, rejected the preliminary objection and request of the appellant for cross-examining Indumati Goda and held him guilty of violating the provisions of 4 (a), (b), (c) and (d) of the FUTP regulations and also Clause A (2) to (5) of the code of conduct under the stockbrokers regulations and, by the order d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lan of the client in executing matching trades. The foundation of enquiry under enquiry regulations is a valid notice and also that the charge levelled therein has to be clear, precise and unambiguious so that the dilinquent knows what exactly he is charged with. The whole time member appears to have jumped to the conclusion that merely because circular trades were executed on 38 days by the appellant, his intention was manipulative. This finding is based on no material on record and it appears that the whole time member has not appreciated the concept of circular/synchronised trades. Admittedly, the trades in question were executed by the clients and the appellant was acting only as a broker. It has not entered into any proprietary trades. If there is some evidence or material available on record that the appellant knew that the trades were fictitious then there would be no hesitation in upholding the finding of the Board. However, there is no such link available either on the record or any finding to this effect has been recorded by the whole time member. There is no material on record to show that the appellant, as a broker knew, that the trades were circular/synchronised. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h large number of trades could have matched on the screen without the appellant as the buyer's broker being a party to the game plan. Since the buy and sell orders were punched into the system simultaneouly in such large numbers and they all matched, we cannot believe that it was a coincidence and the only inference that can be drawn is that there was a prior meeting of the minds before the trades were executed and this disturbs the true price discovery mechanism of the exchange. 6. The submission made by learned senior counsel for the Board may not be wholly correct. There can be a variety of reasons for the trades matching on the screen of the exchange. Merely because a trade has matched both in regard to price and quantity and that the buy and sell orders were placed at the same time it cannot lead to the conclusion that the broker had knowledge of fictitious trades being executed between the buyer and the seller. It has been observed by this Tribunal in a number of cases that on a screen based trading system, it is not possible for a broker to know who the counter party is at the time when the trades are executed. The case of Triumph International Finance Ltd., relied up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the sellet even getting to meet. Therefore it is not possible for the broker to know who the parties were. Merely because the appellant acted as a broker cannot lead us to the conclusion that it must have been about the nature of the transaction. There has to be some other material on the record to prove this fact. The Board could have examined someone from KIL to find out whether the appellant knew about the nature of the transactions but it did not do so. As a broker, the appellant would welcome any person who comes to buy or sell shares. The Board in the impugned order while drawing an inference that the appellant must have known about the nature of the transactions has observed that the appellant failed to eqnuire from its clents 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 q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odi, learned counsel for the appellant has placed on record a copy of the order passed by the whole time member of the Board against Shirish Shah in which, Shirish Shah has been found guilty of executing circular trades. But no evidence has been brought on record to show that the appellant knew the manipulative intent of Shirish Shah or both were acting in concert. The fact that the appellant was never in contact with Ms. Indumati Goda makes no difference for the reasons that at the relevant time there was no law, rules, regulations or orders that required that a broker must collect the registration form only by requiring client to personally come to the broker's office and submit the same. It is the appellant's case that the client's registration form alongwith prescribed KYC documents including proof of identity and number of particulars were collected. It is no case of the Board that KYC norms were not followed by the appellant at the relevant time. In this view of the matter, we are unable to agree with the findings of the whole time member that the appellant had connived with Shirish Shah or was negligent in executing the trades. These findings of the whole time me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the Hon'ble Supreme Court in the case of Haryana Financial Corporation and Anr. Vs. Kailash Chandra Ahuja [(2008) 9 SCC 31]. We have perused the said judgment. This judgment basically lays down the proposition that if there is no prejudice caused to a delinquent employee due to non-supply of inquiry report then the order of punishment cannot be set aside merely on the ground that no copy of enquiry officer's report was supplied. This case also refers to the various earlier decisions given by the Supreme Court on the same issue and the position was summarized by the Court as under:- From the aforesaid decisions, it is clear that though supply of report of Inquiry Officer is part and parcel of natural justice and must be furnished to the delinquent- employee, failure to do so would not automatically result in quashing or setting aside of the order or the order being declared null and void. For that, the delinquent employee has to show 'prejudice'. Unless he is able to show that non-supply of report of the Inquiry Officer has resulted in prejudice or miscarriage of justice, an order of punishment cannot be held to be vitiated. And whether prejudice had been ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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