TMI Blog2010 (8) TMI 1095X X X X Extracts X X X X X X X X Extracts X X X X ..... other for same quantity of the scrip at the same price and that these trades were synchronized. The Board felt that synchronized trades could not be possible without prior understanding and that these were meant to influence the volume of trading in the scrip and were fictitious in nature. On receipt of the investigation report, the Board served the appellant with a show cause notice dated February 20, 2003 alleging that he had violated the provisions of Regulation 7 read with Schedule II to the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (for short stock broker regulations) and the provisions of Regulation 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (for short FUTP regulations) and also the Board's circular dated September 14, 1999 banning negotiated, cross deals etc. In one of the articles of charges attached to the show cause notice it is alleged that The dealings of Prashant Jayantilal Patel which is one of Ketan Parekhs entity in the scrip (sic) and these words have been scored off though they are legible. In the very ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lear that Prashant Jayantilal Patel was putting fictitious, non- genuine and deceptive trades with a view to create misleading appearance of trading. Member also aided, assisted and abetted in creating artificial volumes and false market in the scrip of Ranbaxy Laboratories Ltd. through circular trades and synchronized trades. 10. The transactions in the scrip of Ranbaxy during the period under investigation were negotiated trades executed in accordance with the Exchange guidelines under the Exchange-specified NEAT trading system and as per the SEBI Circular dated 14/09/1999 (copy enclosed). This circular states is that all negotiated deals should be put through the NEAT system which is exactly what we have done in the present matter under reference which may please be noted. (emphasis supplied) The appellant not only denied the allegations but also furnished the details of the clients on whose behalf he had traded in the shares of the company. These details were furnished in paragraph 16 of his reply. He also categorically denied his association or that of his clients with Ketan Parekh or with his entities/associates and this is what he has said in paragraphs 30, 31 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere synchronized deals. He then jumped to the conclusion that such trades were fictitious/non genuine and executed to create artificial volumes. This is what he has said in his report: There was allegation of association and dealings of the member broker with KP entities as mentioned in the show cause notice issued by the erstwhile Enquiry Officer. The undersigned finds from the facts available and from the clarification received from the erstwhile Enquiry Officer that it was mentioned erroneously in the show cause notice. .... .... In light of the above facts, the undersigned is of the view that such trades are not genuine trades and have resulted into generation of artificial volumes. Therefore, the member broker is responsible for the irregularities and violations for which show cause notice was issued to them as mentioned on page 1-2 of this report. These trades also affect the integrity and safety of the market and undermine investors' confidence in the securities market. (emphasis supplied) The enquiry officer also found that the appellant as a stock broker had executed 54 trades for 7 clients giving them 14 different client codes and this, according t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... several synchronized transactions in a single day, circular trading and reversal of transactions etc. Further, I observe that the standard of proof required in a proceeding of this nature is at variance with the standard of proof required in criminal cases. It is sufficient if the preponderance of probabilities suggests towards the indulgence of the delinquent in the misconduct. 5.12 In view of these, I find that that broker has put these trades with a view to create misleading appearance of trading. This synchronization of trades tampers with price discovery mechanism of stock exchange and is against the concept of transparency. The synchronized deals entered into by the broker abetted in creating artificial volumes and false market in the scrip of Ranbaxy Laboratories Ltd. These acts of broker are in violation of the provisions of Regulation 4(a) to (d) of PFUTP Regulations, 1995, which provides that.... By his order dated December 7, 2006 he imposed a minor penalty on the appellant and suspended his certificate of registration for a period of 7 days. It is against this order that the present appeal has been filed. 3. We have heard Shri P.N. Modi, Advocate on behalf of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated the code of conduct and the FUTP regulations. It must be remembered that violation of FUTP regulations involves commitment of fraud which is, indeed, a serious market offence and a high degree of probability is required to establish such a charge. It is by now well settled that the foundation of an enquiry under the enquiry regulations is a valid notice and the charge levelled therein has to be clear, precise and unambiguous so that the delinquent knows what exactly he is charged with and that the enquiry should not travel beyond the charge as levelled. The charge of fraud must be substantially proved as laid and that when one kind of fraud is charged, another kind of fraud cannot, upon the failure of proof, be substituted for it. This has been so held by their Lordships of the Supreme Court in Brijendranath Srivastava v. Mayank Srivastava and Ors. (1994) 6 SCC 117. Having charged the appellant with aiding and abetting Ketan Parekh and his entities in the matter of executing synchronized trades, the appellant cannot be held guilty of aiding and abetting his clients which were not linked to Ketan Parekh at all. Such shifting of the charge is violative of the principles of natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessarily have to be synchronized by the parties and put into the system simultaneously and, therefore, in a negotiated deal the parties also agree on the time when the orders will be put into the system. Even though the parties may put in the buy and sell orders simultaneously, there is no guarantee that they will automatically match or result in an instant trade. The whole or a substantial part or may be a small part of the quantity put into the system may result in a trade and it is also possible that buy and sell orders may not result in a trade at all. This is so because the screen based trading system of the exchange will process the buy and sell orders, notwithstanding the synchronization done by the parties, according to its own programme which will match such orders subject to price time priority which is also known as the price and order matching mechanism. Price time priority signifies two things; first is the matching of price and second is the priority in point of time. Let us elaborate. When a buy order is placed through the system, it will be matched with the best sell order (lowest price) available on the system subject to the condition that no buyer will be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls to be transacted through the exchange even if the price and quantity are settled outside the market. When such deals go through the exchange, they are bound to synchronise. It would, therefore, follow that a synchronised trade or a trade that matches off market is per se not illegal. Merely because a trade was crossed on the floor of the stock exchange with the buyer and seller entering the price at which they intended to buy and sell respectively, the transaction does not become illegal. A synchronized transaction even on the trading screen between genuine parties who intend to transfer beneficial interest in the trading stock and who undertake the transaction only for that purpose and not for rigging the market is not illegal and cannot violate the regulations. As already observed 'synchronisation' or a negotiated deal ipso facto is not illegal. A synchronised transaction will, however, be illegal or violative of the Regulations if it is executed with a view to manipulate the market or if it results in circular trading or is dubious in nature and is executed with a view to avoid regulatory detection or does not involve change of beneficial ownership or is executed to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier circular of August 4, 1998 containing the same reporting requirements. Then came the circular of January 14, 1999 which made the price band (circuit filters) applicable to normal trades to negotiated trades as well. In other words, a negotiated trade could be executed off market but within the price band applicable to the scrip on the exchange. The other details in this circular do not concern us. Finally, came the circular of September 14, 1999 which was discussed at great length during the course of the hearing. The show cause notice issued to the appellant alleges that he had, among others, violated SEBI circular dated 14th September, 1999 banning negotiated, cross deals etc.... Since much has been debated on this circular, it is necessary to refer to the same. The relevant part of this circular reads as under: Please refer to our earlier circulars dated March 31, 1997, August 04 12, 1998 and January 14, 1999 relating to negotiated deals. The following decisions have been taken based on the recommendations of the Committee on Negotiated Deals, which met on September 01, 1999: 1. All negotiated deals (including cross deals) shall not be permitted in the manner prescri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lumes resulting in upsetting the market equilibrium, it would be illegal. In other words, the intention with which a synchronized trade is executed would be the material factor to determine whether the trade is fraudulent. In the case before us, it is the appellant's own case that he executed negotiated deals/trades on behalf of his clients whose details were furnished by him to the Board in the reply to the show cause notice. The motive with which the appellant's clients executed negotiated deals can best be explained by the clients themselves and not by the appellant who was only a broker. It is really surprising that the Board did not question the clients in this regard. Since negotiated trades are legal and the appellant was the broker on both sides, he had no reason to suspect any foul play and it was no part of his due diligence to question his clients as to why they were executing such trades. A stock broker is required to execute faithfully the instructions of his clients if they are not in conflict with any rules, regulations or circulars issued by the Board. The whole time member though analysed the legal position correctly in paragraph 5.4 of the impugned order y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stronomical figure ranging from ₹ 12000 to ₹ 14000 crores. In this background it is inconceivable that a broker whose share in the trading of the scrip was a drop in the ocean could possibly have created artificial volumes. Having regard to the total volumes traded and the miniscule number of reversed trades the possibility of these trades being reversed by coincidence cannot be ruled out and, therefore, we have no hesitation in giving the appellant a benefit of doubt in this regard. 10. We may now deal with the last submission made by the learned Counsel for the appellant. He argued that the enquiry officer for the first time in his report pointed out that the appellant while executing the 54 impugned transactions allotted 14 different client codes to his 7 clients and this, according to the enquiry officer, was done with an ulterior motive to create an impression that the transactions were being executed on behalf of large number of clients in the normal course of business. The whole time member in the impugned order has also referred in great detail to this aspect and has attributed motives to the appellant and eventually found him guilty. This allegation against ..... X X X X Extracts X X X X X X X X Extracts X X X X
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