2013 (2) TMI 521 - AT - Companies Law

Tribunal overturns penalty for traders in front running case, clarifies FUTP Regulations

The Tribunal set aside the penalty imposed by the Securities and Exchange Board of India on traders for violating regulations 3 and 4 of the FUTP ... Penalties imposed under section 15HA of SEBI Act, 1992 - violation of regulations 3 and 4 of the SEBI(Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 - the appellants while trading through B P Equities Pvt. Ltd., was trading ahead of the trades of CGMMPL and had prior information of the order details of CGMMPL and had sold shares prior to the selling of the shares of CGMMPL subsequently earning profits - Held that:- Cannot agree with the submissions of the appellant that the impugned transactions were in the nature of ordinary market operations. Thus no hesitation in holding that the alleged transactions of the appellant are in the nature of 'front running'. The appellants in the present case are traders and not intermediaries. So, following decision in the case of Dipak Patel (2013 (2) TMI 464 - SECURITIES APPELLATE TRIBUNAL, MUMBAI), it is hold that the appellant cannot be held guilty of violating the provisions of regulations 3 and 4 of the FUTP Regulations as that the provisions of regulation 3 are wide in their sweep and application. However, the fact remains that regulation 4(2)(q) of the FUTP Regulations has made a specific provision in respect of manipulative, fraudulent and unfair trade practices indulged in by an intermediary. When a specific provision is available in respect of violation of the regulations it is necessary to apply the specific regulation & the general provisions contained in regulation 3 of the FUTP Regulations cannot be applied to the facts of the case since it is squarely covered by specific provision contained in regulation 4(2)(q) of the FUTP Regulations. There is no specific provision in the Act, rules or regulations prohibiting front running by a person other than an intermediary. Since the appellants are not intermediaries they cannot be held to have violated the provisions of regulations 3 and 4 by indulging in front running. Set aside the impugned order of the adjudicating officer and allow the appeal with no order as to costs. Issues:Violation of regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (FUTP Regulations).Detailed Analysis:Issue 1: Violation of Regulations 3 and 4 of FUTP RegulationsThe appellants, traders in securities, appealed against a penalty imposed by the Securities and Exchange Board of India for violating regulations 3 and 4 of the FUTP Regulations. The Board found that the appellants traded ahead of Citigroup Global Markets Mauritius Pvt. Ltd. (CGMMPL) with prior knowledge obtained from a trader at CGMMPL. The appellants sold shares prior to CGMMPL, earning profits. The appellants argued that the transactions were ordinary market operations, denying any prior information. The Board contended that the telephonic conversations revealed prior information on order details, time, and quantity of the scrips. The Tribunal found the appellants engaged in 'front running,' rejecting the argument of ordinary market operations. However, the Tribunal clarified that FUTP Regulations prohibited front running only by intermediaries, not traders, as per the case of Dipak Patel. Thus, the appellants, being traders and not intermediaries, were not held guilty of violating regulations 3 and 4 of the FUTP Regulations.Conclusion:The Tribunal set aside the impugned order, allowing the appeal with no order as to costs.