TaxTMI 
TaxTMI 
2016 (2) TMI 723
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....e II read 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-brokers through whom the two clients, namely, Mayekar Investments Pvt. Ltd. and M/s. K.P. Investment Consultancy are alleged to have indulged in matching trades thereby creating artificial volumes in the scrip of one Malvica Engineering Ltd. (MEL) during the period 20.12.1999 to 31.3.2000 and 7.8.2000 to 31.8.2000. The gravamen of the allegations levelled against the sub-broker for which the respondent has been held to be vicariously liable is that during the aforesaid period the two clients, who are 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....
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....resulting in unnatural inflation of the price of the scrip, the charges are not substantiated. The penalty imposed was accordingly interfered with. It is against the said order that the SEBI has filed the present appeal under Section 15Z of the SEBI Act. Civil Appeal No.6719 of 2013 (SEBI Vs. Ess Ess Intermediaries Pvt. Ltd.), Civil Appeal No.252 of 2014 (SEBI Vs. M/s. Rajendra Jayantilal Shah, Civil Appeal No.282 of 2014 (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 Time Member passed in each of the cases. ESS ESS INTERMEDIARIES PVT. LTD. "During the course of the said investigation, it was observed that the Noticee was one of the subbrokers who had traded substantially in the scrip of AEL during the first and the s....
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....tured 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 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." M/S. RAJESH N. JHAVERI "During the course of the said investigation, it was observed that the Noticee was one of the subbrokers who had traded substantially in the scrip of AEL during the first period for the said client. The Noticee, for the said client, has allegedly executed synchronized trades for 1,15,870 shares of AEL during the period from July 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....
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.... 4(a), 4(b), 4(c) and 4(d) of the FUTP Regulations 1995 and the Code of Conduct Regulation, 1992, suspension of membership of the respondent for a period of one month had been ordered. The said findings and the penalty imposed have been reversed by the learned Tribunal by the impugned order dated 19.06.2012 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 submitted by one Shri Shirish Shah on his behalf. (iii) Though proceedings had been initiated against Smt. Indumati Goda she has been exonerated of all charges levelled in respect of the transactions in question. (iv) Proceedings against Shri Shirish Shah had also been initiated and in the said proceedings Shri Shah had been found liable and had been appropri....
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....d 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 substantial acquisition of securities or control" and reads as follows : "12-A. Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control.-No person shall directly or indirectly- (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations 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 securiti....
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....ed in a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made thereunder; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognised stock 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 shall indulge in a fraudulent or an unfair trade practice in securities. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely- (a) indulging in an act which creates false or misleading appearance of tr....
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....f 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 all such duties pertain to the high standards of integrity that the stock-broker is required to maintain in the conduct of his business. 19. Chapter VI of the Conduct Regulation, 1992 deals with liability for contravention of the provisions of the Act, Rules or the Regulations in the following terms :- "CHAPTER VI PROCEDURE FOR ACTION IN CASE OF DEFAULT [Liability for contravention of the Act, rules or the regulations - 25. A stock broker or a sub-broker who contravenes any of the provisions of the 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 Securiti....
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....growth and development of the economy. The provisions of the SEBI Act and the Regulations will, therefore, have to be understood and interpreted in the above light. 22. It is a fundamental principle of law that proof of an allegation levelled against a person may be in the form of direct substantive evidence or, as in many cases, such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts 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 process that a reasonable/prudent man would adopt to arrive at a conclusion. 23. Let us apply the aforesaid test to the facts of the present cases before us wherein admittedly there in no direct evidence forthcoming. The first relevant fact that has to be t....
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....an 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 broker/sub-broker may be between the broker/sub-broker and the client or it could be between the two brokers/subbrokers engaged in the buy and sell transactions. When over a period of time such transactions had been made between the same set of brokers or a group of brokers a conclusion can be reasonably reached that there is a concerted effort on the part of the concerned brokers to indulge in synchronized trades the consequence of which is large volumes of fictitious trading resulting in the unnatural 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 invol....
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.... would depend on the extent of the persistence on the part of the broker in indulging with transactions of the kind that has occurred in the present cases. Upto an extent such conduct on the part of the brokers/sub-brokers can be attributed to negligence occasioned by lack of due care and caution. 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 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 particulars of the offending transactions, must be held to be sufficient compliance of the req....