Dr. C.K.G. Nair, Member
1. The Adjudicating Officer (‘AO’ for short) of the Securities and Exchange Board of India (‘SEBI’ for short) vide order dated March 27, 2018 imposed a penalty of Rs. 25 lakh upon the appellant for violation of Sections 12(A)(a), 12(A)(b), 12(A)(c) of SEBI Act, 1992 and regulations 3(a), 3(b), 3(c), 3(d), 4(1), 4(2)(a) & 4(2)(e) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (‘PFUTP Regulations’ for short). This appeal has been filed aggrieved by the said order.
2. The impugned order relates to trading in the scrip of M/s. Gangotri Textiles Ltd. (‘Gangotri’ for short) during the period April 7, 2005 to May 31, 2006. The appellant traded in the scrip in Bombay Stock Exchange Ltd. (‘BSE’ for short) through her broker, namely, Parasram Holdings Pvt. Ltd. (‘Parasram’ for short). On December 12, 2013 SEBI issued a show cause notice under Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995. Thereafter, following the normal procedure of providing personal hearing, seeking replies etc. the AO passed an order dated July 22, 2014 whereby a penalty of Rs. 60 lakh was imposed on the appellant. Aggrieved by that order, an appeal was filed before this Tribunal (Appeal No. 324 of 2014) and vide order dated April 29, 2016 this Tribunal remanded the matter to the AO SEBI with the following direction:-
“Since the question as to whether the appellant traded on the Stock Exchange at Mumbai as a sub-broker or in individual capacity goes to the root of the matter, we deem it proper to quash and set aside the impugned order and restore the matter for fresh decision on merits and in accordance with law.”
3. Thereafter, SEBI appointed a fresh AO. Further, a notice dated August 24, 2017 was issued to the appellant seeking to specifically clarify whether all the transactions with regard to the appellant’s dealings in the scrip of Gangotri during the period of investigation as alleged in the original show cause notice were carried out in the capacity of a subbroker. The appellant was also advised to submit all documents relating to her registration as sub-broker along with copy of the KYC documents in support of her submissions. Further, after giving multiple opportunities of personal hearing and replies etc. the order impugned in this appeal has been passed.
4. In the impugned order it is held that a number of entities collectively called Vishvas group, including the appellant herein, have manipulated trading in the scrip of Gangotri during the investigation period. Their relationship and/or trading relationship are detailed in a table on Pages 26 – 27 of the impugned order. During the investigation period these entities had executed a large number of synchronized trade, circular trades and reversal trades and traded in significant variation to the Last Traded Price (LTP) in the shares of Gangotri. Similarly, the total buy and sell quantity in BSE by the members of the Vishvas group during the investigation period was 5198404 shares and 4711903 respectively. Similarly, the group bought and sold 3876420 and 3592980 shares respectively at NSE. The appellant had bought and sold 342246 shares of Gangotri in BSE. During the investigation period the price of the scrip varied from 43 rupees to 71 rupees indicating substantial volatility. Findings relating to the appellant as well as the Vishvas group synchronized trading, circular trading, reversal trading and how the LTP was manipulated by placing orders at far away prices form LTP has been done are all described in detail in the impugned order. Since the facts relating to the quantum of trading are not disputed we do not propose to go into the details of the data as such.
5. Shri Shambhu Nath Singh, the learned counsel for the appellant submitted the following:-
(a) Vide an order dated April 13, 2016 by the Whole Time Member of SEBI the appellant was restrained from dealing in the securities market for a period of three years for the same violation. The appellant has undergone this punishment. Therefore, the AO should not have passed another direction relating to any further penalty for the same cause of action. This principle is upheld in the order of the Hon’ble Supreme Court in the matter of Kunjan Nair Sivaraman Nair vs. Narayanan Nair and Others (2004) 3 SCC 277. Therefore, the AO has travelled beyond his powers in the matter as imposing a second penalty for the same cause of action is illegal and unsustainable.
(b) Without prejudice to the above, the AO should not have passed any order because the appellant was trading in BSE in the scrip of Gangotri as a subbroker and not as a client. She had no connection with the Vishvas group and no connection has been established in the impugned order. The appellant did not make any profits; rather incurred losses.
(c) Synchronized trade per se is not illegal as held by this Tribunal in the matter of Ketan Parekh vs SEBI (Appeal No. 2 of 2004 decided on July 14, 2006). Appellant had no intention to manipulate the market and was doing normal trading business on behalf of her clients therefore if at all any manipulation was involved it was done by the clients, no by the appellant. In any case, it was impossible to manipulate the market as the trading had been done on the exchange platform, on the anonymous trading screen.
(d) The AO did not consider the fact that the appellant was trading for her clients as a sub-broker and as a sub-broker she could have traded in any stock exchange in India following the order of the Hon’ble High Court of Delhi in the matter of National Stock Exchange Member vs Union of India & Ors. 2005 (85) DRJ 298 (DB) which held that a broker needs to take only a single registration with SEBI even if a stock broker has membership of, and functions from, several stock exchanges. Accordingly, the learned counsel contends that the AO is in contempt of court as this order of Hon’ble Delhi High Court was not appealed against and has attained finality. By holding that a SEBI registered sub-broker of Delhi Stock Exchange could not trade as a sub-broker in BSE the AO has invited contempt of Court. The operational part of the order of the Delhi High Court is extracted hereunder:-
“For the reasons given above, the appeal is allowed and the impugned judgment is set aside and we clarify that only a single registration with the SEBI is required even if a stock broker has membership of, and functions from, several stock exchanges. The consequence is, therefore, that he will have to pay registration fees for registration with the SEBI only for the first registration with the SEBI, and he does not require any further registration even if he operates in several stock exchanges. If he has paid any fees to the SEBI for any subsequent registration after his first registration, the said fees has to be refunded to him by the SEBI forthwith. Paragraph vi of Part A of the Circular dated 28.3.2002 issued by the SEBI and any other part of the circular inconsistent with Section 12(1) as interpreted by us is hereby quashed.”
6. Shri Anubhav Ghosh, the learned counsel for the respondent, on the other hand, submitted that the appellant has not given any documents / evidence to demonstrate that she was dealing on behalf of her clients in terms of bank account transactions, demat account transactions, ledgers, contract notes etc. Moreover, the appellant was registered as a client of Parasram, her broker, since June 2002 and executed the impugned trades in BSE as a client of Parasram. All the trades were carried out in the Unique Client Code (UCC) of the appellant and that Unique Client Code is not that of any sub-broker. The broker, Parasram itself confirmed that the impugned trades were carried out by the appellant in her capacity as client. There is no documents / agreement entered into between the stock broker, the appellant and her so called client Perfect Car Scanners Pvt. Ltd. The finding in the order of the Delhi High Court in the matter of National Stock Exchange (supra) relates to a broker. Even a broker needs membership with an exchange to trade in it while it needs only one registration with SEBI. In any case, that order is applicable to brokers; not to sub-brokers. Therefore, the AO has not invited any contempt of court. Moreover, the appellant was aware of this legal position and therefore she had made an application for registration before BSE which was subsequently withdrawn. Further, pursuant to amendment to broker regulations in the year 2003 sub brokers were prohibited from handling funds and securities of clients and issuing contract notes to clients. Therefore, there is no laxity in the finding of the AO that the appellant was executing her trades in the capacity as a client and not in the capacity of a sub broker of BSE.
7. We do not find any fault in holding that the appellant has violated provisions of the SEBI Act and PFUTP Regulations as held in the impugned order.
8. For convenience the relevant Sections of SEBI Act and Regulations of PFUTP Regulations, 2003 are reproduced here:-
“SEBI Act, 1992
Section 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 recognized 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 securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;
“PFUTP Regulations, 2003
Prohibition of certain dealings in securities
3. No person shall directly or indirectly—
(a) buy, sell or otherwise deal in securities in a fraudulent manner;
(b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized 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 recognized 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 recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.
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 trading in the securities market;
(e) any act or omission amounting to manipulation of the price of a security;
9. Given the above provisions of the SEBI Act and PFUTP Regulations it is evident that the appellant, along with other entities in the Vishvas group have indulged in synchronized and circular trading and contributed substantially in raising the LTP. The exact figures relating to each category of trading and LTP contribution is given in the impugned order. What is disputed by the appellant is that she had no connection with the Vishvas group and synchronization / circularity happened just by chance. However, given the proximity of time between trading by these entities and the number of such instances of trades we are unable to appreciate this submission of the appellant. Further, the contention of the appellant is that appellant was trading as a sub broker and the matter was remanded to SEBI by this Tribunal on April 29, 2016 mainly on this ground. However, it is clearly demonstrated in the impugned order that the appellant could not produce any evidence relating to her contention that she was trading on behalf of a client, namely, Perfect Car Scanners Pvt. Ltd.
10. The impugned order at page 20 states the following reasons:-
“i) There is no documentary evidence to demonstrate the dealings of the Noticee on behalf of client in terms of bank account transactions, demat account transactions, ledgers, contract notes as mentioned above.
ii) The Noticee was registered as client of Parasram since June 2002 and executed the impugned trades as client of Parasram;
iii) As per the order & trade log, the orders were placed and executed in the client code of the Noticee. As per UCC database, client code is registered as client and not as sub broker;
iv) Parasram confirmed that the impugned trades were carried out by the Noticee were in the capacity of client;
v) There is no tripartite agreement entered into between the stock broker, the Noticee and her client Perfect Scanners Pvt. Ltd.,
vi) Legal provisions does not permit a subbroker registered in one stock exchange to operate in other stock exchange without registering in the concerned stock exchange;
vii) Noticee was aware of legal provisions of requirement of separate registration to operate in more than one stock exchange, when she had made an application for registration in BSE, which was subsequently withdrawn by her.
viii) Pursuant to amendments to Brokers Regulations in the year 2003, Sub-broker is barred from handling funds & securities of clients and issuing contract notes to clients;”
11. Further, trading by the Vishvas Group as a whole and individually by the appellant was substantial quantity as explained in para 4 (supra) of this order and there were synchronized trades, reversal trades as well as manipulation of LTP. Therefore, the findings in the impugned order that the appellant has violated the stated provisions of SEBI Act and PFUTP Regulations 2003 cannot be faulted.
12. The orders relied on by the appellant do not come to her help. Reliance on Kunjan Nair (supra) is of no help since it is well established now that SEBI is empowered to initiate multiple proceedings in the same matter. Further, reliance on Ketan Parekh (supra) is of no help to the appellant as the nature and type of trading of the appellant clearly dem
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onstrates the intention to manipulate the market. Similarly, reliance on the order of the NSE Member (supra) is distinguishable as it is regarding a broker having the need for taking SEBI registration for trading in multiple stock exchanges and the appellant is only a sub broker and in any case trading as a client of broker Parasram in BSE. 13. The trading details, its nature, time etc. reveal the manipulation in the scrip of Gangotri. Apart from stating that that the appellant has no connection with the Vishvas group the appellant could not explain why and how so many of her trades were in the nature of synchronized and reversed trades and that too most of the times within a few seconds with trades of other entities in the Vishvas group. Such synchronization and reversal of trade is not possible without a prior meeting of minds as held in the judgment of the Hon’ble Supreme Court in Securities and Exchange Board of India vs Kishore R. Ajmera (2016) 6 SCC 368. 14. The submission that the penalty imposed is too harsh also does not have any merit. On remand by this Tribunal and on reconsideration the AO of SEBI has reduced the amount of penalty from Rs. 60 lakh to Rs. 25 lakh. Further, the penalty imposable under Section 15HA of SEBI Act is three times the amount of profit or Rs. 25 crore whichever is higher. Therefore, while imposing an amount of Rs. 25 lakh only as penalty the AO has factored in all the mitigating circumstances including that the appellant might have made loss. Therefore, in the given facts and circumstances, we do not find any reasons to interfere with the amount of penalty imposed. 15. Consequently, appeal is dismissed. No order on costs.