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M/s. Agroy Finance & Investment Ltd. & Another v/s The Securities and Exchange Board of India

    Appeal No. 65 of 2007, 66 of 2007

    Decided On, 05 August 2010

    At, SEBI Securities Exchange Board of India Securities Appellate Tribunal

    By, MEMBER
    By, MEMBER

    Mr. Bharat Merchant, Advocate for the Appellant. Dr. Mrs. Poornima Advani with Ms. Pranita Mhatre, Advocates for the Respondent.

Judgment Text

Per : Justice N.K. Sodhi, Presiding Officer (Oral)

This order will dispose of two Appeals no. 65 and 66 of 2007 which raise identical questions of law and fact. Counsel for the parties are agreed that the decision in Appeal no. 65 of 2007 will govern the other case as well. Facts are being noticed from this appeal.

2. The appellant is a stock broker registered with the Securities and Exchange Board of India and a member of the Delhi Stock Exchange (DSE). It was served with a show cause notice dated September 28, 2004 alleging violation 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 the Regulations) and also the code of conduct specified in Schedule II to the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992. The appellant along with M/s. Delhi Securities Limited, the appellant in the other appeal alongwith one A. Nitin Capital Services, another broker on DSE, are said to have entered into synchronized trades in the scrip of M/s. Shonkh Technologies International Ltd. By placing the orders at the same price, same quantity and almost at the same time. It is further alleged in the show cause notice that the matching orders placed by the appellant along with the other brokers resulted in artificial creation of volumes and rigged the prices up by trades which were not genuine. The appellant filed its reply to the show cause notice denying all the allegations. An enquiry officer was appointed in terms of the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 to go into the charges levelled against the appellants. The charge of manipulative synchronized trading could be established only on the basis of the trade and order logs that are usually maintained by the stock exchanges which clearly indicate the pattern of trading. In the instant case, the trades were executed on DSE which was not maintaining the necessary record. The order log was not maintained by DSE for the relevant period and it could only furnish a copy of the trade log to the enquiry officer which was not legible at all. This is what the enquiry officer observed in para 17 of her report:

?Furthermore, there are no legible copies of the trading details and the details of the orders placed by the 3 brokers on record evidencing their having indulged in synchronized transactions with AFL. In view of the absence of these details, copies of the legible order log, trade log with details of client IDs, order time, order quantity, price, counterparty broker etc. were sought by me on an urgent basis from DSE vide letter dated October 26, 2004. However, even the DSE vide their letter dated October 28, 2004 forwarded only the trade log details and expressed their inability to furnish the order log details, on the ground that the order log was not maintained by them for the period under consideration.?

Again, in para 21 of her report the enquiry officer had this to say: ?These submissions are examined in tandem with the fact that out of 14800 shares of STIL traded by AFL during the period under investigation, there was a delivery of 9200 shares of STIL. The said trades were not squared off as is done normally in cases of price manipulation; AFL had not executed any proprietary trades, but traded for his two clients for only 4 of the trading days during period under investigation with low trading volumes. In the absence of the details of order log or legible copies of the same, as stated earlier, it would be difficult to sustain the charge of synchronized trading against AFL, although it cannot be disputed that trading was concentrated between the 3 brokers mentioned earlier (with a common set of clients) due to a prior mutual understanding arising out of a possible nexus.?

Accordingly, by her report dated May 31, 2005 she recommended the penalty of censure to be imposed on the appellant.

2. On receipt of the enquiry report, the appellant was served with a show cause notice under the aforesaid enquiry regulations to show cause why action be not taken against it as recommended by the enquiry officer. It appears that the enquiry report was thereafter considered and examined by the whole time member when he realized that the penalty of censure was not enough and he directed yet another show cause notice to be issued to the appellant to show cause why a higher penalty as considered appropriate be not imposed on it. The appellant filed its report and on a consideration of the matter and without examining the order and trade logs (as they were not available) came to the conclusion that the appellant was guilty of the charges levelled and that its certificate of registration should be suspended for a period of one month. Accordingly, by his order dated September 24, 2007 he imposed the penalty of suspension of the certificate of registration of the appellant for a period of one month. It is against this order that the present appeal has been filed.

3. We have heard the learned counsel for the parties and are of the view that in the absence of the record which could establish the manipulative trades allegedly carried out by the appellant along with two other brokers, the charge cannot be established and the appeal deserves to succeed. It is common case of the parties that the order logs were not available for the relevant period and that a copy of the trade log that was furnished by DSE was illegible. The appellant made a request that the trade logs be furnished to it and all that could be supplied to him was an illegible copy of the same which he has attached with the memorandum of appeal. We are unable to read the same. The charge of manipulative trades and violation of Regulation 4 of the Regulations involves fraud and being a serious charge cannot be treated lightly nor can it be established in the absence of the records. The enquiry officer rightly observed that the charge of synchronization of trades carried out by the appellant along with the other brokers could not be established but we wonder why she recommended the imposition of penalty of censure. What is even more surprising is that on receipt of the enquiry report, the whole time member in the absence of the records thought that it was a fit case to impose a higher penalty than the one recommended by the enquiry officer. How could such a serious charge be established when the order logs and trade logs were not available. This is the basic record which shows the pattern of trading. In these circumstances, we are constrained to observe that the respondent Board should have been fair and just in not proceeding with the matter. Be

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that as it may, we cannot uphold the findings recorded by the whole time member in the absence of the essential record. This apart, we find that the appellant, as per the show cause notice, had executed only 5 trades on 4 days for very small quantities and there is nothing on the record to show that the orders put in by the appellant had rigged the price of the scrip of the company as alleged. It is pertinent to mention that the enquiry officer in para 21 of her report reproduced above has observed that the trades of the appellant had not been squared off as is done normally in cases of price manipulation. In these circumstances, we cannot but allow the appeals and set aside the impugned orders which we hereby do and leave the parties to bear their own costs.