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Naman Securities & Finance Pvt. Ltd. v/s Securities and Exchange Board of India

    Appeal No. 110 of 2012

    Decided On, 28 August 2012

    At, SEBI Securities Exchange Board of India Securities Appellate Tribunal

    By, P. K. MALHOTRA
    By, MEMBER & OFFICIATING PRESIDING OFFICER (OFFG.) & S.S.N. MOORTHY
    By, MEMBER

    For the Appellant: J.J. Bhatt, Advocate. For the Respondent: Dr. Poornima Advani, Ajay Khaire, Ms. Rachita Romani, Advocates.



Judgment Text

S.S.N. Moorthy, Member

1. The appellant is a corporate stock broker on the Bombay Stock Exchange Limited having registration with the Securities and Exchange Board of India (for short the Board). The present appeal arises out of an order passed by the whole time member on May 3, 2012 suspending the certificate of registration of the appellant for a period of two months. The impugned order was passed by the whole time member acting under section 19 of the Securities and Exchange Board of India Act, 1992 read with regulation 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (for short the SEBI Act and the Intermediaries Regulations). The appellant was found guilty of violating regulation 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 and clauses A(1), (2), (3), (4) and (5) of the code of conduct prescribed for stock brokers in Schedule II under regulation 7 of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (referred to hereinafter as the FUTP Regulations and Brokers Regulations respectively).

2. The Board conducted investigation in the scrip of Adani Export Ltd. for the period November 27, 2003 to December 23, 2003. During the investigation period the said scrip registered unusual price rise creating suspicion about market manipulation. It was alleged that the rise in the price of the scrip from Rs.209.55 to Rs.443.10 during the investigation period spanning over 19 trading days was the result of synchronized/reversal trades involving the appellant, a few clients and the sub-broker. The appellant traded in the impugned scrip for its client Ess Ess Intermediaries Pvt. Ltd. (the client) which was a sub-broker of ASE Capital Markets Ltd. According to the Board, the appellant, was found to have aided and abetted its client in executing synchronised/reversal trades creating artificial volumes in the scrip under consideration. The designated authority authorized under Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Office and Imposing Penalty) Regulations, 2002 submitted his report holding the appellant guilty of violating regulation 4 of the FUTP Regulations and code of conduct prescribed for stock brokers. However, in the enquiry report the designated authority concluded that no punitive action was necessary since monetary penalty under adjudication proceedings had already been imposed on the appellant. The whole time member differed. He was of the view that the conduct of the appellant called for a higher penalty. Accordingly, a show cause notice was issued on September 17, 2010 calling upon the appellant to show cause why a higher penalty should not be imposed for violations stated above. The appellant filed a detailed reply denying the allegations. A personal hearing was also granted to the appellant. After due consideration of the submissions of the appellant, the whole time member concluded that the appellant was guilty of the impugned violations and so suspension of certificate of registration for two months was appropriate punishment. The appellant challenges the above finding in the present appeal.

3. We have heard Shri J.J. Bhatt, learned counsel for the appellant and Dr. Poornima Advani, learned counsel for the respondent Board.

4. The appellant’s learned counsel drew our attention to the decision of this Tribunal in the case of Rajendra Jayantilal Shah vs. Securities and Exchange Board of India (Appeal no.118 of 2012 decided on July 16, 2012) and submitted that the appellant’s case was squarely covered by the decision in the above order of the Tribunal. It was strenuously argued that the violations listed out in the present appeal and the nature of wrong doing are exactly the same as in the case of Rajendra Jayantilal Shah mentioned supra. It was submitted by the appellant’s learned counsel that the whole time member had failed to bring on record justifiable reasons to discount the recommendations of the designated authority. It is pointed out that no valid reasons have been adduced by the whole time member to establish that the appellant deserves a higher penalty. The appellant’s learned counsel made a pointed reference to the time gap between the alleged commission of the offence and the date of the impugned order. He also made a reference to the time gap between the date of hearing by the whole time member and the date of the impugned order which goes against the provisions laid down in regulation 28(2) of the Intermediaries Regulations. With regard to the facts of the case it is argued that the appellant was not supplied with the entire order logs relating to transactions during the investigation period and so the appellant was handicapped in analysing the transactions in their entirety. There was no link between the appellant and the client and the whole time member has not brought on record any nexus between the parties which would clinch the issue of aiding and abetting. Out of the alleged synchronized/reversal trades trade logs relating to only 2 days were supplied for verification by the appellant. There was no connivance with the clients and sub-brokers in the alleged manipulation of price and volume of the scrip, nor was there any negligence on its part as a broker. Suspension of certificate of registration is a very harsh punishment in the case of a broker and when that is imposed after the lapse of several years from the date of alleged commission of offence there would be no deterrent impact. On the other hand, the appellant is faced with serious consequences in its business dealings. The appellant’s learned counsel would also submit that the action of the Board amounts to double jeopardy.

5. Dr. Poornima Advani, learned counsel appearing for the Board submitted that each case has to be judged on the basis of the facts contained therein and the decision of the Tribunal in the case of Rajendra Jayantilal Shah cannot be applied to the facts case. According to her, there were fictitious/synchronized and reversal trades numbering around 710 and the constant matching of orders with same counter party establishes fraudulent intention of the appellant. The appellant was provided with a proper analysis of the trade and order details and no prejudice has been caused to the appellant by not providing the order logs in their entirety. In fact, the transactions of 2 days clearly illustrate the manipulative dealings and the appellant cannot claim any innocence in the regular matched trades. There is no case of double jeopardy in as much as the Board is empowered to take action for adjudication and for issuing directions separately as per the relevant provisions of the SEBI Act. The appellant was involved in conscious aiding and abetting of the manipulative deals of the client and it was also negligent in the discharge of its duties.

6. We have considered the rival submissions. A perusal of the impugned order and the order of the whole time member in the case of Rajendra Jayantilal Shah shows that the facts and findings are almost identical. The scrip, the investigation period and the wrong doing are the same. The proceedings of the whole time member took the same course in both the cases. So we are unable to appreciate the argument of the learned counsel for the Board that there is any factual distinction in the present case.

7. The appellant’s contention of double jeopardy is of no significance since the provisions of the SEBI Act permit parallel proceedings for adjudication and directions under section 11.

8. In the present case, a monetary penalty of Rs.1,50,000 was imposed on the appellant on June 18, 2009. The designated authority under Intermediaries Regulations submitted his report to the whole time member on June 23, 2009. His recommendations are as under:-

'I find that in respect of the same violation, a monetary penalty of Rs.1,50,000/- (Rupees one lakh fifty thousand only) has been imposed on the Noticee vide Adjudication Order No.VSS/AO-96/2009 dated June 18, 2009. In view of this, I hereby recommend no punitive action as specified in regulation 27 of the Intermediaries Regulations against the Noticee.'

A show cause notice was issued to the appellant on September 17, 2010 by the whole time member. In the show cause notice the appellant was directed to show cause why a higher penalty should not be imposed as the whole time member had concluded that the alleged violations under FUTP Regulations and code of conduct prescribed for stock brokers ‘deserve higher penalty’. The appellant was very prompt in filing its reply and appearing before the whole time member for personal hearing. A perusal of the show cause notice and the impugned order shows that no justifiable reason has been given by the whole time member for differing from the view of the designated authority. We are conscious of the fact that the whole time member has every right under the provisions of the SEBI Act to deviate from the report of the designated authority and impose a higher penalty. But it requires recording of proper and valid reasons which would justify a higher penalty as compared to the one already imposed by the adjudicating officer. As already observed, the show cause notice contains only the view of the whole time member that the alleged wrong doing calls for a higher penalty. The only observation in the impugned order on this issue is that the recommendation of the enquiry officer 'is not commensurate with the alleged violations committed.' In the facts of the case, we are of the view that the impugned order does not contain proper, valid and justifiable reasons for imposing a higher penalty and deviating from the report of the designated authority. A reading of the impugned order suggests that the same set of facts as considered by the adjudicating officer has been reiterated by the whole time member and on the same set of facts and evidences suspension of certificate of registration is ordered.

9. The allegation both in the order of the adjudicating officer and in the order of the whole time member is that the appellant has violated FUTP Regulations and code of conduct prescribed for stock brokers. The penalty imposed by the adjudicating officer was Rs.1,50,000 and this was remitted by the appellant without any contest. The wrong doing of the appellant is established on the basis of trade logs relating to 2 day’s trades during which structured deals are said to have taken place. In the case of a broker nexus with the client and sub-broker and a conscious participation in the trades are necessary for aiding fraudulent transactions. In the present case the adjudicating officer has established the wrong doing of the appellant with reference to the impugned provisions and imposed a penalty of Rs.1,50,000. The whole time member has not brought on record any further material or evidence to show that the appellant deserves a higher penalty. We are not entering into a discussion about the role of a broker vis--vis that of a client for which observations have been made in some orders passed by this Tribunal in the past. Suffice it to say that in the facts of the present case no convincing case has been made out to establish nexus of parties and serious wrong doing on the part of the broker calling for suspension of his certificate of registration as a broker.

10. There is some merit in the contention of the appellant that the impugned order is delayed and it is not in conformity with regulation 28 (2) of the Intermediaries Regulations. We are conscious of the fact that the said regulation does not prescribe a blanket time limit. It has been laid down that after providing the person with an opportunity of being heard the designated member may pass appropriate orders as expeditiously as possible and

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endeavor shall be made to pass the order within 120 days from the date of receipt of reply to the notice of hearing. In the present case, personal hearing took place in April 2011 whereas the order was passed in May 2012. Since the impugned order has proceeded in the same lines as in the case of the order of the adjudicating officer and no new material has been considered in the interregnum the whole time member could have passed the orders as per the time limit suggested in the regulations or at least within a reasonable time. The above fact along with the absence of any justifiable reason for deviation from the findings of the designated authority definitely act as a mitigating factor in favour of the appellant. 11. Suspension of certification of registration of a broker is a harsh punishment. In the present case, an order of suspension of certificate of registration is passed in 2012 for the alleged violation of 2003. Proper impact on the market and deterrence in the minds of wrong doers can be ensured only when such punishments are inflicted within a reasonable period of time. Having regard to the peculiar facts of the case, we are of the view that the case does not call for suspension of certificate of registration of the appellant. We, therefore, set aside the order and allow the appeal. No costs.
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