BEFORE THE SECURITIES APPELLATE TRIBUNAL
In the matter of:
Shri Madhukar Sheth Appellant
Securities and Exchange Board of India Respondent
Shri B. M. Ganu
Shri Madhukar Seth For Appellant
Shri Kumar Desai,
Ms. Rita Shivalkar,
Shri Vijayakrishnan G.
Legal Officer, SEBI For Respondent
The present appeal is directed against the order passed by the Respondent on 12.6.2002. By the said order the certificate of registration granted to the Appellant, a member of the Bombay Stock Exchange, (BSE) was suspended for a period of 2 years with effect from 27.6.2002.
Amara Raja Batteries Ltd., (ARBL) is a public limited company with its registered office in the State of Andhra Pradesh. It is mainly engaged in the manufacture of sealed lead acid batteries for industrial purposes. It’s shares are listed on BSE, National Stock Exchange (NSE), Hyderabad Stock Exchange and Calcutta Stock Exchange Ltd. The price of ARBL’s share at BSE was Rs.91/- in the first week of October 2000. It went upto Rs.205/- on January 1, 2001 and reached a high of Rs.320/- on March 8,2001. On March 9, 2001, BSE closed the normal trading at 2 p.m. to facilitate the Badla session. At that point of time price of ARBL scrip was Rs.308.40. Same day NSE was functioning till 4.30 p.m. and the price of the scrip fell to Rs.266.75 by the time NSE was closed. It was Friday. Market was closed on Saturday and Sunday. On Monday i.e. March 12, 2001 when the market opened BSE adjusted the price of various scrips to that of NSE including that of ARBL. The price fall continued on 12th March and thereafter by March 19, 2001 it touched a low of Rs.78.50. Abnormal changes were not only in the price but were noticed in the volume also. The volumes in the scrip of ARBL traded were approximately 50,000 to 60,000 per day in October 2000. It went upto about 8-15 lakh shares per day in the month of February and first of week of March 2001 at both BSE & NSE. The average trading in the scrip of ARBL from January to March 2001 were to the extent of 10-15 lakh shares per day i.e. approximately 30% of the free floating stock of ARBL. In the wake of such abnormal price and volume movement in the ARBL scrip traded on BSE & NSE, the Respondent received complaints alleging market manipulation/irregularities in the trading of the scrip. In that context the Respondent ordered investigation to ascertain the role played by various persons/intermediaries, and violations, if any, of the regulatory provisions by them. The Appellant was one of the members whose involvement in the matter was subjected to investigation. The investigation is stated to have revealed that Shri Harinarayan Bajaj and his son Shri Rahul Bajaj were the dominant traders in the ARBL’s shares during the period August 2000 to March 2001, and some of the members of BSE and NSE had failed to exercise due care and skill in their dealings and also aided and abetted Shri Harinarayan Bajaj in creating a false market in ARBL’s scrips. In the light of the information collected during the course of investigation, it was noticed that the Appellant had failed to exercise due diligence and aided and abetted Shri Bajaj. In that context the Respondent decided to conduct a detailed inquiry into the role and conduct of the Appellant in trading in the said scrip. Accordingly an Inquiry Officer was appointed on 18th June, 2001 to inquire into the affairs of the Appellant in his dealings in the scrip of ARBL and the possible violations of the rules, bye-laws and regulations of the Stock Exchanges, provisions of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market)Regulations, 1995 (the FUTP Regulations) and the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (the Stock Broker Regulations). The Inquiry Officer on concluding the inquiry came to the conclusion that the Appellant had failed to exercise due care and skill in his dealings with Shri Bajaj in the scrip of ARBL as mandated by clause A(2) of the Code of Conduct applicable to the Stock Brokers and also, that the Appellant had aided and abetted Shri Harinarayan Bajaj and his family members in creating a false and misleading market in the scrip of ARBL violating the provisions of the FUTP Regulations, that the Appellant enabled Shri Bajaj to build huge positions in the scrip of ARBL which ultimately resulted into the creation of false market in the scrip of ARBL. He also viewed that the Appellant had executed 39.39% of total trades in the scrip of ARBL for Shri Bjaj in BSE and the same can not be treated as a normal brokerage transaction. He recommended suspension of the certificate of registration granted to the Appellant for a period of two years. The Respondent vide notice dated 20th February, 2002 communicated the findings arrived at by the Inquiry Officer alongwith the recommendation of the Inquiry Officer to the Appellant and asked him to show cause as to why the penalty as recommended by the Inquiry Officer should not be imposed against him. The Appellant responded to the same by filing written explanation and also by making oral submissions before the Respondent’s Chairman. The Appellant denied the charges and stated inter alia that he was not involved in the price manipulation of the scrip of ARBL and that he did not aid and abet Shri Bajaj. The Chairman of the Respondent adjudicated the show cause notice. He accepted the recommendations of the Inquiry Officer and passed an order on 12.6.2002 suspending the certificate of registration granted to the Appellant, for a period of two years with effect from 27.6.2002.
Claiming to be aggrieved by the said order, the Appellant preferred the present appeal. The substantive prayers in the appeal are that (i)the Respondent’s order dated 12.6.2002 be set aside (ii)that in case the suspension is to be sustained the period of suspension be deemed to have commenced from 16.3.2001.
Shri Madhukar Seth/ Counsel made the following submissions.
The Appellant is a member of BSE since 1994 without ever defaulting on payment and was always taking due care and caution in his business, that the Appellant came across with Shri Harinarayan Bajaj and accepted him as a client after taking “know your client” form and executing an agreement, in August 2000. Shri Bajaj was mostly dealing in the shares of ARBL, that the margins and payments were regularly collected from him, as also the delivery of shares. On 12.3.2001 the price of the ARBL scrip crashed and Shri Bajaj failed to honour his payment commitment and his cheques were dishououred. The whole period covered under the impugned order can be divided into two parts (1) August 2000 to 9th March 2001 and (2) 12th March 2001 onwards. As far as the 1st part is concerned there was no problem, that BSE conducted inspection of the records of the Appellant and nothing adverse had been noticed, that BSE had not viewed that the Appellant was not collecting adequate margins or was found wanting in any other matter. It was submitted that the steep fall in price of the ARBL scrip on 12th March 2001 and thereafter was not the creation of the Appellant and that the Respondent itself has attributed the cause to Shri Harinarayan Bajaj as the Inquiry Officer in his report has stated that “it is clear from the above that Shri Harinarayan Bajaj and his son Shri Rahul Bajaj were responsible for the creation of a false market in the scrip of ARBL”. If the price of ARBL scrip had not crashed, the crisis would not have occurred.
The Appellant had taken due skill and care together with caution in his dealings because he had taken client agreement, collected client a/c opening form, taken deposits and margins from the client from time to time, collected payment on time for pay-in to the Exchange and deliveries were collected in time for sale of shares, that it was Shri Bajaj’s dishonesty that put all those dealing with him in trouble. The Appellant had enquired about the financial position of Shri Bajaj and based on the available information there was no reason to believe that he was financially unsound not to deal with. According to the Respondent about 30 brokers were trading for Shri Bajaj, that it does not stand to reason to say that all the 30 brokers were lacking care, and there was no such charge also against the brokers. At no time there was any criticism by the Surveillance Department of BSE or NSE of adequacy of care or lack of care on the part of the Appellant or any other broker who traded for Shri Bajaj and this shows that the Brokers were careful till the going was good.
The Appellant has not done any transaction on his account and he has not artificially raised any price, that he acted only as broker and he was not aware that Shri Bajaj was acting through many brokers and that Shri Bajaj was jacking up the scrip price, that he came to know that other brokers were also trading for Shri Bajaj only on receipt of the investigation report from the Respondent.
The Appellant had obeyed every rule/regulation of BSE/and the Respondent applicable in handling the client. Trading in BSE is done on online and there is an online surveillance system in BSE and through this system BSE had access to the details of the transactions and the persons from/for whom the transactions were effected, that the identity of client was not available to others except to BSE, that BSE very well knew that Bajaj was trading in the shares of ARBL through 30 brokers. Knowing thus the role of Shri Bajaj neither BSE nor SEBI did anything to stop him from manipulating the market. At no stage the Surveillance Department of BSE had imposed any special margin and/or ad-hoc margin so as to suspect anything wrong in respect of the trading in ARBL scrip, that since the Surveillance Department had all the data including the price variations in the scrip, it was its duty to make inquiry and inform/caution the Brokers or adopt other measures to prevent the manipulations. The Surveillance Deptt. only was knowing about the Brokers who were carrying out transactions in the matter and could have found out as to who were the persons behind the market manipulation. Though the Surveillance Department was well aware of the upward movement of the price of the scrip from Rs.80 to Rs.308 it did nothing to stop the crisis. In the circumstances finding fault in a broker is wrong and the Respondent ought to have found fault in the Surveillance Department, for its failure. The Appellant was not aware of any position as there was huge trading in ARBL’s scrip and his volume was hardly 15% thereof.
The Appellant did not aid Shri Bajaj, to manipulate the market, that he only acted as Broker. He is a victim of the circumstances and also because of the short sale made by certain operators in market from 2.3.2001. He lost heavily on Shri Bajaj alone, that if he had colluded with Shri Bajaj he also would have earned, like Shri Bajaj, a lot of money. He did not know till the SEBI report disclosed, that 90% of BSE’s trading volume in ARBL’s scrip was for Shri Bajaj. The charge of aiding and abetting has been brought in without any basis, that behind “aiding and abetting” there should be an intention that the Inquiry Officer has not established any such intention of the Appellant, that it is also not the allegations that the Appellant had beneficial interest in the transactions, that the charge of aiding and abetting is based only on the inference by the Inquiry Officer.
The Appellant reiterated that as the investigation by the Respondent revealed that Shri Harinarayan Bajaj and his son Shri Rahul Bajaj were the predominant traders in the ARBL’s scrip during the period August 2000 to March 2001, that their trading accounted for approximately 30% of the total trading on BSE and NSE, and they had absorbed most of the deliveries in the scrip by purchasing and carrying forward their position on BSE. This itself proves that due care and skill was exercised by the Appellant at all times by taking proper margins from Bajajs for their carry forward positions and taking deliveries after making due payments only, that only when the ARBL’s scrip price crashed on 9.3.2001 and downward trend continued. It was in the context that the margin cheques collected from Shri Bajaj for Rs.19 lakhs and RS.35 lakhs got bounced and the pay order for Rs.50 lakhs taken in faovur of Sheth Securities P. Ltd.(sister concern) was not handed over to the Appellant, the problem surfaced. On seeing the price of the scrip nose diving, Shri Bajaj decided to back out from his commitments and did not hand over the pay order of Rs.50 lakhs and also gave instructions to stop the payment of 2 cheques i.e. for Rs.19 lakhs and Rs. 35 lakhs, which could have actually taken care of Rs.1,04,00,000 liability. There were consecutive 8 downward circuits to the scrip immediately on the opening of the trading session on 12th March and nobody had any exit route and the things went beyond everybody’s control only due to faulty circuit system imposed by the Respondent, that the Respondent subsequently realised its folly and removed the circuit system from ARBL scrip and all other Group A scrips, that had the faulty circuit system not been there, the Appellant and other Brokers would have been saved. The different settlement days followed by NSE & BSE had also contributed to the crisis.
He had taken all care prescribed by the Respondent, that even the ledger of Shri Bajaj shows very smooth working of the client with credit balance even after paying all margins demanded by BSE, but the price cashed beyond the margins, that as the BSE’s margin system was unscientific and adhoc, brokers suffered losses. The brokers took due care and skill, and still the Respondent punished brokers, the real victims.
The Appellant has been charged on two counts i.e. (1) not taking due care and skill (ii) aiding and abetting Shri Bajaj. These two charges can not stick together as due care not taken means the Appellant was honest and tried to take care but failed to take due care or sufficient care, while the charge of aiding and abetting a criminal implies that the concerned person was dishonest and hence aided the person in doing wrong things, that if the Appellant was dishonest there was no question of taking due skill and care, that thus the charge of “lack of due care” applies only if the Appellant was honest and the second charge of aiding applies only if the Appellant was dishonest, that the Appellant can not be both honest and dishonest at the same time, so atleast one charge has to be dropped.
The Appellant’s business was stopped from 16.3.2001 by BSE at the behest of the Respondent due to ARBL scrip fiasco. During the investigation period his business was stopped, and the Respondent passed the order awarding penalty of suspension for 2 years with effect from 27.6.2002. It was submitted that, even if it is assumed, without admitting that the imposition of penalty of two years’ suspension by the Respondent is tenable, the suspension should be considered to have commenced from 16.3.2001, that he can not be deprived of his business from 16.3.2001 till 27.6.2002 for nothing. In this context he referred to the approach of the courts in criminal cases taking into consideration the days spent in jail by the accused for the purpose of computing the period of imprisonment awarded after trial. The Appellant referred to the arbitration award in AM No – M – 070/2001 in Seth Securities P. Ltd. Vs Harinarayan Bajaj passed by the Arbitrators (NSE) in favour of the Appellant’s sister concern to show that Shri Bajaj had defaulted in making the payments due to the Appellant.
With reference to the submissions made by the learned Counsel for the Respondent citing the statements of the Appellant, before the Investigating Officer, it was submitted that the Respondent is quoting out of context certain statements on selective basis, that in fact the Appellant’s statement before the investigating officer establishes his bonafides. He submitted that Seth Securities P. Ltd., and the Appellant are two separate legal entities and their activities should not be viewed as the activities of one and the same person
Shri Kumar Desai, learned Counsel, appearing for the Respondent submitted that the Appellant was trading on BSE and NSE, that Seth Securities P. Ltd. through which the transactions were made on NSE is an outfit of the Appellant. In this context he referred to the Appellant’s statement before the Investigating Officer, that “he was making statement on behalf of both i.e. Madhukar Seth, Member BSE and Seth Securities P. Ltd., Member, NSE”, that to a question the Appellant had stated that the said Seth Securities had only two directors and out of which he was one and the other one was one Girish Patel.
Shri Desai submitted that the Appellant in his deposition before the Investigating Officer had admitted that “our main client was Mr. Harinarayan Bajaj who had done more than 90% of the total volume on both the Exchanges through us”. Learned Counsel referred to the said deposition and stated that according to the Appellant “Shri Bajaj started trading with us some time around August 2000 ……that the nature of transactions of Shri Harinarayan Bajaj in the scrip of Amara Raja Battery Ltd., was in the form of weekly buying and selling. He would buy on the first two days of the settlement and sell on the last two days of BSE and NSE. In the process of his trading he used to take home the difference or profit, if any, in the form of either cheque or delivery of the shares. In the period of August 2000 to March 2001 he had taken delivery of various shares amounting to approx. Rs.4 crores. The carry forward transactions in the account of Shri Bajaj were minimum”. Learned Counsel submitted that the Appellant had admitted that “we have collected regular margins at the end of the settlement as announced by the Exchange. It is not practically possible to collect daily margins from clients due to daily fluctuations in prices.” He submitted that the margins are required to be collected before effecting the transactions and not after effecting the transactions.
Shri Desai referred to the inquiry report and submitted that the volume traded in the scrip of ARBL during the period subjected to inquiry by the Respondent need be viewed in the size of the floating quantum of shares. He submitted that the volumes in the scrip were approximately 50,000-60,000 per day in October, 2000, that it went upto around 8 lakh shares to 15 lakh shares per day in the month of March 2001 at both BSE and NSE, that it is to be noted that the public holding in ARBL was approximately 43% of the paid up capital. The average trading in the scrip from January to March 2001 was to the extent of 10 to 15 lakh shares per day, which contributed approximately 30% of the free float of ARBL. He submitted that such abnormally high volume trades are indicative of the presence of false market. In the light of the role of Shri Harinarayan Bajaj and his son Shri Rahul Bajaj, learned Counsel referred to the observation made by the Inquiry Officer that they were responsible for the creation of a false market in the scrip of ARBL and various members of NSE and BSE had aided and abetted them in their act of market manipulation. He submitted that Bajajs’ trading accounted for approximately 30% of the total trading on NSE & BSE. In the period August 2000 to November 2000 they have absorbed most of the sales in the scrip by purchasing and carrying forward their position on BSE. In the period November 2000 to March 2001 Shri Bajaj started making use of the different trading cycles of BSE & NSE to shift his position from one exchange to another. Shri Bajaj would sell on the exchange where the trading cycle was ending and simultaneously buy on the Exchange where the trading cycle was beginning. Analysis of trading also indicated that as deliveries kept coming in the market across settlement, Shi Bajaj was absorbing the same and carrying it from one exchange to another by using the arbitrage mechanism. It was seen that Shri Harinarayan Bajaj and his son Shri Rahul Bajaj were shifting position of approx. 5.5 lakh shares of ARBL between NSE & BSE in settlement No.1 of NSE. This increased to approx.11 lakh shares of ARBL as of Settlement No.9 of NSE.
Shri Desai referred to the following observation in the report relating to the Appellant’s role:
“M/s. Madhukar Seth is a member of The Stock Exchange, Mumbai and M/s. Sheth Securities Pvt. Ltd. is a member of National Stock Exchange. Shri Madhukar Sheth is Director on the board of both the broking entities. The member has traded in the scrip of Amara Raja Batteries Ltd. on behalf of his client Shri Harinarayan Bajaj from August 2000 onwards on both the exchanges.
The trading details of the member shows that Shri Hari Narayan Bajaj used to generate maximum volumes through M/s. Madhukar Sheth and M/s. Sheth Securities Pvt. Ltd. For M/s. Sheth Securities Pvt. Ltd., member, NSE the gross volume during the period August 2000 to March 2001 was approx. 90 lac shares. M/s. Madhukar Sheth, Member, BSE has also traded and have done similar volumes at BSE on behalf of Shri Hari Narayan Bajaj. In addition to square off transactions, M/s. Madhukar Sheth has also carried forward Shri Hari Narayan Bajaj’s purchase position till settlement no 50. The settlement wise trading of the member on behalf of Shri Hari Narayan Bajaj is given as under
Trading at BSE:
The Investigating Authority summoned Shri Madhukar Sheth, Director of the firms and his statement was recorded. The member stated that since he knew Shri. Shailesh Bajaj, default member of BSE, there was no need for introduction of Shri. Hari Narayan Bajaj. It was seen from the records that the member had not taken any initial deposit from the client. Most of the time, accounts were settled on bill to bill basis. At times, the member has retained the profits of the client as margin. The member in his sworn statement before the Investigating Authority stated that he was not aware that his client was trading with other members of BSE and NSE.
For settlement no 50/2000-01, a bill was raised for Rs.1,15,34,348/- against which the client issued a cheque for Rs.35,00,000/-, which was dishonoured on account of ‘stop payment’ instructions by the client. At the end of settlement number 51/2000-01, Shri Harinarayan Bajaj had a huge debit balance of Rs. 1,77,71,909/- with the member mainly due to outstanding of settlement number 50 and Mark to market losses of approx. Rs.60,00,000/-.
The member on oath has stated that they had bought 1,25,000 shares of Amara Raja Batteries on NSE for the client on March 12, 2001 and would have bought another 2,00,000 shares on behalf Shri Hari Narayan Bajaj. However, the client did not deposit enough Margins with the member. Further, the trading terminal of the member was also deactivated for exceeding Gross Exposure. Therefore, the member could not execute these buy transactions.”
Shri Desai submitted that the Inquiry Officer has convincingly established the charge of lack of due skill and care on the part of the Appellant and referred to the following observations of the Inquiry Officer:
“It is an admitted fact that Mr. Madhukar Sheth had executed trades in the scrip of ARBL for Mr. Harinarayan Bajaj amounting to a total volume of 46,26,387 shares (purchases) and 44,38,233 shares (sales) with a delivery of 1,09,578 shares, in Settlement Nos. A22 to A50 in BSE. Shri Seth had allowed the client to a continuous carry forward of trades, which enabled Shri Bajaj to build up huge positions in the market in the scrip of ARBL. As per the trading details it is clear that Shri Bajaj has generated maximum volumes through Shri Sheth and M/s Sheth Securities Pvt. Ltd. a member of NSE, in which Shri Sheth is the promoter director and having controlling share in its equity. The gross volume of Shri Sheth and Sheth Securities Pvt. Ltd. during the period August 2000 to March 2001 was approximately 90 lakh shares each.
It is to be noted that Shri Bajaj had a debit balance of Rs.1,77,71,909 at the end of settlement No.A 51 with Sheth. If the outstanding amount due by Shri Bajaj to Sheth Securities Pvt. Ltd. is also taken into account the total amount defaulted by Shri Bajaj is a whopping Rs.12.33 crores. Hence Shri Sheth together with Sheth Securities in NSE has suffered a huge loss in their dealings with Shri Bajaj in the scrip of ARBL.
Shri Sheth had admitted that since he knew Mr. Harinarayan Bajaj’s son Mr. Shailesh Bajaj, a defaulter member of BSE there was no need for introduction of Mr. Harinarayan Bajaj. This (though father and a major son are distinct legal persons) normally warrants a high degree of exercise of due skill and care by Shri Sheth in dealing with the client.
Shri Sheth has allowed the client to take positions which is beyond the client’s financial position. During the oral hearing, Shri Sheth submitted that Shri Bajaj had rich properties in Fountain and Marine Drive areas and therefore he thought Shri Bajaj is financially capable of trading in shares. However, he had not shown any evidence to establish his claim that he was satisfied of Shri Bajaj’s networth. In view of the fact that Shri Bajaj had defaulted a huge sum of Rs.1,77,71,909 to Shri Sheth, his submissions are not convincing and hence can be concluded that Shri Sheth had allowed Shri Bajaj to expose trading in securities beyond his financial capabilities. With regard to the allegation that Shri Sheth has traded in the scrip of ARBL beyond his own financial capability, it was submitted by him during the oral hearing that he had dealt in the scrip in his own account in a very small way and he was very much within his means. It is also understood that Shri Sheth is not in the defaulters list of BSE. In view of the same a lenient view may be taken on the said charge/allegation.
As revealed in the hearing held on 24.10.2001, during the period from August 2000 to March 2001, the entire volume of trades executed by Shri Sheth was for Mr. Harinarayan Bajaj, except about 9000 shares for few other clients. This shows that Shri Sheth had given a very high exposure to Shri Harinarayan Bajaj by executing series of trades with buy positions ranging from 5,000 shares to 3,04,012 shares. It should be noted that there are no quantitative restrictions laid down with regard to execution of each trade and the same is left to the prudential risk management norms of the Stock Broker within the framework of law. Such a huge exposure to Shri Bajaj is certainly not indicative of any prudential risk management norms adopted by Shri Sheth. It is significant to note that Shri Sheth had no dealings with Shri Bajaj in the past. Therefore, there is no convincing defense from Shri Sheth that how he had given such a high exposure to Shri Bajaj. This vindicates/ exposes the shallowness of Shri Sheth’s argument that he had taken full care and precaution while running the account of Mr. Bajaj.
The conduct of Shri Sheth in allowing Shri Bajaj to ride on the market has not only made himself to suffer huge financial loss but also put the market place in danger by inducing innocent investors and thereby shattering their confidence in the market. Even an ordinary and prudent man can imagine such series of transactions and excessive speculative exposure given to the client would, by any standards, lead to serious consequences and repercussions in the process of discovery of fair market price of a security.
From the aforesaid, it is clear that Shri Sheth had failed to exercise due care and skill in his dealings with Shri Bajaj in ARBL, as mandated by the said clause A(2) of the Code of Conduct. I, therefore, find that Shri Sheth is guilty of violating Clause A(2) of Schedule II under Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations 1992.”
Shri Desai submitted that from the factual position stated by the Inquiry Officer referred to above, it is clear that the Appellant was trading for Shri Bajaj since August 2000 and he knew the pattern of Shri Bajaj’s trading and also was aware of the conduct of Shri Bajaj shifting positions etc., and it does not stand to reason to say now that the Appellant was unaware of the activities of Shri Bajaj. In fact the truth is that the Appellant was helping Shri Bajaj in his effort to build up a false market in the scrip of ARBL and the Appellant can not absolve himself of its active association with Shri Bajaj in the said process. His conduct on 12th March trying to buy more shares for Shri Bajaj need be noted in this context.
With reference to the Appellant’s version in the context of the charge of aiding and abetting Shri Bajaj to manipulate the market, Shri Desai submitted that the Appellant had access to information of the total of the online transactions executed in ARBL scrip, though individual level details were not available and that, he would have certainly noticed from the total volume transacted, there was something abnormal and could have taken corrective measures. He knew the total volume of the transactions, he knew the ongoing market price and certainly he knew the extent of the trade he was executing for his client i.e. Shri Bajaj, that in that context no caution or warning from the Surveillance Department was necessary to see the writing on the wall. He submitted that it is not the duty of the Surveillance Department to pass on the information to the brokers, that the objective of surveillance function is entirely different and the Appellant can not blame the Surveillance Department for the market manipulation indulged in by Shri Bajaj with the active support of the Appellant and other brokers. The Appellant through his sister concern viz.Seth Securities Ltd., was dealing in huge quantities of ARBL shares for Shri Bajaj on BSE and NSE. In this context the learned Counsel referred to the findings of the Inquiry Officer and submitted that the said finding is based on facts and deserve to be accepted. He referred to the following portion in the inquiry report:
“Shri Sheth had executed series of transactions for Mr. Harinarayan Bajaj with a very insignificant portion of the said transactions resulting in delivery of securities. The transactions were mainly speculative, without the intention of transfer of beneficial ownership as observed from the pattern of trading. Shri Sheth has admitted that he had a proprietary trading in the scrip, though the same is small as compared to the trades executed for Mr. Bajaj. Mr. Sheth has stated that he was not aware of Shri Bajaj dealing with other brokers, nor had the information that Mr. Bajaj is indulging in creating a false market in the scrip of ARBL. Mr. Sheth contended that what he did was a normal broking transaction as a stock broker. Shri Sheth further insisted during the hearing that “speculation is officially allowed by BSE by way of carry forward system as also by position square off. The speculation was not excessive as long as the client was paying the margin imposed by the exchange. Whether the position is excessive or not is determined by the surveillance department and they impose either adhoc margins or additional carry forward margins or concentrated margins. Since no such margins were imposed by BSE except normal carry forward margins and daily margins I had reasons to believe that the quantity of trading allowed is not excessive”. With reference to Shri Sheth’s said contentions no doubt speculation is not barred but it should be noted that the speculation is permitted as long as it does not result in market manipulation and hampers the fair price discovery of a scrip in the market. It is also the duty of the individual member to do client level position monitoring in specific scrips at its end so that the clients do not default in pay-in obligations and also ensure a fair and safe environment resulting in the safety, security and integrity of the market place.
As per the details given to Shri Sheth, his client Shri Harinarayan Bajaj had traded in ARBL for a total volume of 1,11,36,003 shares (purchases) and 1,00,58,623 shares (sales) in NSE & 1,35,57,641 shares (purchases) & 1,20,55,152 shares (sales) in BSE. His trading accounted for approximately 30% of the total trading on NSE and BSE. Since the arbitrage in the scrip of ARBL was due to the shifting of position by Shri Harinarayan Bajaj and his son Shri Rahul Bajaj, the volumes generated by arbitrageurs are also to be taken into account. Therefore, approximately 60-70% of the volumes in the scrip of ARBL on BSE & NSE could be attributed to Shri Harinarayan Bajaj and his family. As per the distribution schedule of ARBL approximately 43% of its paid up capital i.e. about 43 lakh shares are with the public. The average trading in the scrip from January 2001 to March 2001 was to the extent of 10-15 lakh shares per day. This constitutes approximately 30% of the free float of ARBL. Such abnormally high volumes are indicative of a false market in the scrip. It has been observed from the trading details of Mr. Harinarayan Bajaj and Mr. Sheth, that Shri Sheth has executed 39.39% of total trades of Mr. Harinarayan Bajaj in BSE. Further, his Sheth Securities Limited had executed 40.31% of the total trades of Mr. Harinarayan Bajaj at NSE. Though Shri Sheth, at the time of execution of trades, was not aware of his volume of trades in ARBL vis-à-vis the total volume of the Stock Exchange in ARBL, he must atleast, be aware of the implication of such a huge exposure to Shri Bajaj on the price of the scrip. Accordingly, the series of trades executed by Shri Sheth for Mr. Bajaj cannot be simply termed as normal brokerage transactions. It is therefore, clear that Shri Sheth was responsible for the client to build huge positions in the market leading to creation of a false market in the scrip of ARBL. From the trading data; failure of Shri Sheth to exercise due care and skill in his dealings with Shri Bajaj; allowing client to; build huge positions in the market, indulge in excessive speculation, dominate and control the market trades in ARBL are the clear evidences/instances based on which conclusive inferences can be drawn that Shri Sheth had aided and abetted Shri Harinarayan Bajaj and his family in creating a false market in the scrip of ARBL.
Therefore, I find that Shri Sheth is guilty of violating Clauses (a), (b) and (d) of Regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 1995.”
Shri Desai submitted that the Appellant had admitted before the Investigating Officer that he was transacting such huge volumes for one person and that one person was Shri Bajaj. He submitted that Shri Bajaj was not an ordinary client to the Appellant that the proximity of Shri Bajaj to the Appellant is evident from the following statement of the Appellant:
“on March 9, 10, & 11th Mr. Bajaj was requesting us to increase his purchase positions and for that he gave us two cheques of Rs.35 lakhs and Rs.19 lakhs towards margins and for payment if it came for that. He also promised to pay further Rs.50 lakhs on March 12, 2001. Accordingly he came to our office on March 12 at 9.40 AM and ordered us to buy 2 lakh shares.”
It is also an admitted fact that by the Appellant’s own version that he was taking orders at short intervals from Shri Bajaj on phone for huge quantities without bothering to take care of anything else, that there is reason to believe that the Appellant was aware of Shri Bajaj’s design to manipulate the market and the Appellant extended full co-operation in this regard.
Shri Desasi submitted that Shri Bajaj was propping up price of ARBL scrips by absorbing deliveries at a higher price and the Appellant also propped up the price and obliged him, that the Appellant had admitted that he was to receive approximately Rs.15 crore, net of margins from Shri Bajaj in his account.
Learned Counsel submitted that the Appellant had admitted negligence on his part. In this context he referred to the following submissions made by the Appellant on 13.5.2002 that “Mr. Madhukar Seth therefore suffered in all directions. At the most Mr. Madhukar Seth can be said to be guilty of negligence and his negligent act has punished him a lot”. He had again submitted that “It is therefore submitted that for some negligence of Mr. Madhukar Seth, if any, a severe punishment can not be imposed. A token and nominal punishment will suffice the purpose and shall meet ends of justice.”
Shri Desai submitted that the Appellant himself has thus admitted that he was negligent and he was seeking lenient view on the ground that he ha already suffered financial loss as a result of his negligence.
Learned Counsel submitted that the trading terminal of the Appellant at BSE was switched off by BSE because of his failure to meet his obligation to BSE and that disabling was not done at the behest of the Respondent for the charges referred to in the show cause notice. In this context he submitted that the very fact that the Appellant could not meet his financial obligation to BSE itself indicates his incapacity to pay, and that incapacity was mainly for the reason that he was trading beyond his capacity. The Appellant’s contention that Bajaj had enough assets is not a valid excuse to give him over exposure. The question is as to whether Shri Bajaj had enough liquidity to meet his obligations which the Appellant had not bothered to verify. Shri Bajaj’s failure to meet his obligation is indicative of the fact that he was trading beyond his financial capacity. With reference to the Appellant’s contention that the BSE’s Surveillance system was defective, their margin collection policy was wrong, circuit filtering is unwanted etc. Shri Desai submitted that the said views of the Appellant are of no relevance, as these are well considered measures put in position by the concerned authorities to protect the interest of investors and the fact that these measures did not suit the requirements of the Brokers is not an excuse to defy the same. With reference to the favourable decision in the Arbitration case filed by the Appellant, referred to by the Appellant, the learned Counsel submitted that the said award has nothing to do with charges for which the Appellant has been penalised by the Respondent vide the impugned order. He submitted that the charges against the Appellant are of serious nature and having proved the charges he can not escape from the attendant consequences and the suspension of his certificate of registration in that context for a period of two years can not be considered in any way harsh. With reference to the Appellant’s submission that disabling a broker from dealing from his terminal for default in making payment can not be considered on par with the suspension of certificate of registration imposed by way of penalty in the context of the proven charges of violation of Stock Broker Regulations and FUTP Regulations and that the currency of the suspension ordered for the said violations should be prospective as ordered by the Respondent.
I have carefully considered the pleadings and the submissions made by the parties and the material on record, and my views are as follows:
The impugned order is in the context of market behaviour in terms of price and volume, witnessed in trading in the shares of ARBL, particularly in February – March 2001. It is seen that the price of the scrip which was hovering around Rs.91/- in the 1st week of October, 2000 reached Rs.205/- on January 1, 2001 and touched a high of Rs.320/- on March 8, 2001 and drifted to Rs.78.50 on March 19,2001. Further the volume traded in the scrip around 50,000 to 60,000 shares per day in September/October, 2000 went upto the extent of 10 to 15 lakh shares per day in January – March 2001. Such huge trading has to be viewed in the context of the floating stock of ARBL, which was around 43 lakh shares. It is noted that the average trading in the scrip was to the extent of 10 to 15 lakhs shares per day accounted for 30% of the free float of ARBL. Such high volume trade is not normal and certainly suggests a false market in the scrip. From the facts on record it is clear that the market for ARBL scrip was manipulated. It is in that context one has to see as to who are the persons directly or indirectly involved in creating such a false market. The market manipulation is a team action. The Respondent in its effort to find out the people responsible for the same had identified Shri Harinarayan Bajaj and his son Shri Rahul Bajaj as the persons directly involved. There were aided and abetted by certain brokers. One of such brokers according to the Respondent, involved in the matter is the Appellant herein. The finding of the Respondent in this regard, as reflected in the impugned order is as under:
“I have perused the extracts of the investigation report, the Enquiry Report, the reply filed by the broker member and the submissions made on behalf of him at the time of personal hearing. It is established that Shri Harinarayan Bajaj and his son Rahul Bajaj were primarily responsible for creating a false market in the scrip of ‘ARBL’ and because of their transactions the volumes in the scrips also went up to around 8-15 lakhs shares per day in the month of February & first week of March 2001 from 50-60,000 shares per day in Oct, 2000. The broker member had executed series of transactions for Shri Harinarayan Bajaj thereby enabled him in conducting carry forward transactions in the scrip of ARBL. The same were mainly speculative and without the intention of transfer of beneficial ownership. In this regard, it is to be noted that even an ordinary and prudent man can imagines such series of transactions and excessive speculative exposure given to the client would, by any standards, lead to series (?) consequences and repercussions in the process of discovery of fair market price of a security.
It is established that the broker member by executing the aforesaid transactions aided Shri Bajaj in dominating and controlling the market trades in the scrip of ‘ARBL’. In this regard, I find that it was the duty of the broker member to assess the networth of Shri Harinarayan Bajaj before allowing him to take such huge positions in the scrip of ARBL. However, I find that the broker member has failed to produce any documentary evidence in support of the networth of Shri Harinarayan Bajaj. It is further established that the broker member executed 39.39% of total trades of Shri Harinarayan Bajaj in BSE and further M/s. Sheth Securities Ltd. (Member, National Stock Exchange) wherein the broker member is on the Board of Directors had also executed 40.31% of the total trades Shri Harinarayan Bajaj. The trades executed by the broker member on behalf of Shri Harinarayan Bajaj enabled Shri Harinarayan Bajaj in creating a false and misleading market in the scrip of ARBL.
Further, I have examined Regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 which states as under:
“Prohibition against market manipulation
4. No person shall –
(a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person;
(b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market;
(c) indulge in any act which results in reflection of prices of securities based on transaction that are not genuine trade transactions;
(d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the market price of securities;
(e) pay, offer or agree to pay or offer, directly or indirectly, to any person any money or money’s worth for inducing another person to purchase or sell any security with the sole object of inflating, depressing, or causing fluctuations in the market price of securities”.
In the instant matter, I have seen from the investigations that the said broker member has allowed Shri Harinarayan Bajaj to take huge positions in ARBL beyond his financial capabilities and hence enabled Shri Harinarayan Bajaj in creating a false and misleading market in the said scrip. In view of the same, I am of the opinion that the broker member has aided and abetted Shri Harinarayan Bajaj which led in creation of false market in the scrip of ARBL. Therefore, on the facts of the case I come to conclusion that the broker member has violated regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995.
Further, I have noted that though there are no quantitative restrictions laid down with regard to the execution of each transaction, the broker member has to function according to the prudential risk management norms and within the framework of law. The same is evident from the facts that the broker member has failed to exercise due skill and care in his dealing with Shri Harinarayan Bajaj and his family members in the scrip of ARBL as contemplated under the provisions of SEBI (Stock Brokers and Sub Brokers) Regulations 1992. The conduct of the broke member in his dealings with Shri Harinarayan Bajaj in the scrip of ‘ARBL’ is detrimental to the interest of investors and the safety of securities market. “
It is in the light of the said finding the Respondent decided to suspend the certificate of registration granted to the Appellant, for a period of two years from 27.6.2002.
On a perusal of the impugned order and the material before the Tribunal, it appears that the market collapse in the case ARBL shares was in the context of mega size trading allegedly done for one client -–Bajajs – by several brokers. Gigantic size of the transactions effected for the said client has been stated in the order. It appears that there were several players. But the Appellant was one of the dominant players in this game. There is no evidence on record to show that the 30 and other odd brokers whose services Shri Bajaj made use of, were acting in concert. But I am not prepared to accept that these brokers, though not all, at least some of them were unaware of “something” abnormal in the trading of ARBL scrip in February 2001 to March 2001. An experienced broker like the Appellant can not be totally unaware of the happenings in the scrip at that time. The Appellant had traded for Bajajs from August 2000 and continued to trade in huge quantities through out. It is noted that the Appellant had traded in ARBL scrip for Bajaj and executed transactions if 46,26,387 shares (purchases) and 44,38,233 shares (sales) in the delivery of just 1,09,578 shares in Settlement A-22 to A-50 in BSE The details of the Settlementwise transaction have been furnished in Tabular format in the earlier part of this order. The said transactions accounted for nearly 40% of the total trades of Shri Bajaj. Further M/s. Sheth Securities P. Ltd. a Member of NSE which is undoubtedly an outfit of the Appellant had also executed about 40% of the total Trades of Shri Bajaj. Thus the trades executed by the Appellant and his associate company for Shri Bajaj is exorbitant and to me it appears to be not innocuous transactions. It is on record that Shri Bajaj had defaulted a huge sum of about Rs.1.8 crores to the Appellant at the end of Settlement No.51. It is also noted that series of transactions conducted by the Appellant for Shri Bajaj also appears to have enabled Shri Bajaj to carry forward transactions in the ARBL scrip, that the Appellant thus facilitated Shri Bajaj to ride on the market causing loss not only to himself but put the market in danger. The fact that the appellant had also suffered loss is not an excuse to absolve the Appellant of the charges. An ordinary and prudent stock broker would assess the situation taking into consideration all the relevant factors while trading for such a client from whose conduct, as revealed from the facts on records, clearly demonstrated that he was indulging in manipulation solely to benefit him. The Appellant had started trading for Shri Bajaj since August 2000. Before executing series of transactions for his client, any prudent broker would have gone a bit far to ascertain the goings around and also would have normally assessed the financial capability of the person for whom he is trading. It is on record that the Appellant had given high exposure to Shri Bajaj. Before giving such high exposure, he was bound to ensure the capacity of Shri Bajaj to meet the resultant obligations. There is nothing on record to show that he had been diligent in this regard. The areawise size of the client’s residential accommodation, the locality of residence, the nature of the vehicle used etc. stated to have been considered by the Appellant in my view are not the reliable parameters to judge the financial credibility of a person. The Appellant’s submission that he had taken client registration form, entered into agreement etc.by itself is not sufficient. Exercise of due diligence in ongoing transactions is a continuous process and it is not a one time measure to be adhered to while taking up the first transaction. The Appellant’s submission that it was Bajaj’s dishonesty that created the problem does not absolve him of his failure to discharge his duties as a prudent broker. The Appellant’s version that but for the crisis on 9th March, 2001, nothing would have happened is very strange. All the safety measures are put in position to prevent crisis not to augment crisis. In my view the ARBL crisis was partly due to the failure of the persons concerned in exercising due skill and care expected to have been exercised by them. In my view it was the failure that caused the crisis and not vice versa. That failure could have been avoided if the concerned person had exercised due care and diligence as required. The Appellant’s argument that it was the duty of the Surveillance Deptt. to alert & caution the brokers about Shri Bajaj’s trading activities is difficult to accept. The question whether there was a failure from the surveillance angle, is a different matter. It is for the concerned authorities to address the same and take corrective measures, if considered necessary. In the present appeal we are not examining the role of the Surveillance Deptt. The role of the Appellant is the subject matter. The question is whether the Appellant did exercise due skill and care which as a broker he was expected to exercise. In my view, on the basis of the material available on record, it is difficult to conclude that the Appellant had exercised due skill and care in dealing with Shri Bajaj. It is to be noted that it is not that the Appellant had carried on only few trade transactions for Shri Bajaj for a short period. He had transacted in huge volumes for Shri Bajaj and the association dated back to August 2000. If the Appellant could not see any design or pattern in the transactions which Shri Bajaj was executing through the Appellant during the period, then the Appellant certainly deserves to be blamed for being indifferent and unconcerned and for that reason he is at fault for the failure to exercise due skill and diligence. The main thrust of the Appellant’s submission was that the entire fiasco was due to the failure of the Surveillance Deptt. of BSE, faulty system of margin collection, introduction of circuit filters, and the practice of allowing different settlement dates in BSE & NSE. In this context one would like to know that with all the said “faulty systems’ why the crisis developed in the case of ARBL scrip and not in the other scrips as well ? The answer is quite obvious. The crisis in ARBL scrip was a designed one by the interested persons and not a “system failure” as is being attempted to be made out by the Appellant. The Appellant had submitted that he has done his duty as a broker and he is supposed to protect the interest of his client and he is expected to act according to the instructions of the client. It is true that a broker can not act of his own against the instructions of the client. But no one can compel him to be a party to manipulate the market. No doubt a broker is supposed to protect the interest of his client, but he is also expected to protect the interest of the securities market in which he operates. It is his duty to ensure not to be a party to any market manipulation and that the market in which he operates is run on a healthy and non manipulative basis.
It is noted that for Settlement No.50/2000-01 a bill was raised for Rs.1,15,34,348 against which Shri Bajaj issued a cheque for Rs.35 lakhs which was dishonoured on account of “stop payment” instructions by Shri Bajaj. At the end of Settlement No.51/2000-01 Shri Bajaj had a huge debit balance of Rs.1.8 crore. It is also on record that the Appellant had stated that he had bought 1,25,000 shares of ARBL on NSE for Bajaj on 12.3.2001 and would have bought another 2 lakh shares for him but for Shri Bajaj’s failure to deposit enough margins. When he purchased 1,25,000 shares on 12.3.2001 and decided to go for another 2 lakh shares, he could not have been unaware of the market behaviour as emerged on NSE on 9th March, 2001. But he did the transaction to prop up the price to benefit Bajaj.
It is noticed from the inquiry report that the Inquiry Officer had charged the Appellant for (a) failure to exercise due skill and care in his dealings with Shri Bajaj and (b) aiding and abetting Bajajs in creating a false market in the scrip of ARBL.
The first charge i.e. failure to exercise due skill and care is on the following grounds:
“(a) Shri Sheth by virtue of his trading in the scrip of ARBL on behalf of Shri Harinarayan Bajaj has failed to exercise due skill and care in his dealings
(b) Shri Sheth was well aware of the fact that Shri Harinarayan Bajaj is the father of the defaulter broker of BSE, however, it has chosen to trade for him;
(c) Shri Sheth has allowed the client to take position which is beyond his financial position.
(d) Shri Sheth has traded in the scrip of ARBL beyond his own financial capability.
and therefore, violated Regulation 7, Schedule II of Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Regulations, 1992”
The fact that the Appellant by virtue of his trading in the scrip of ARBL on behalf of Shri Bajaj has failed to exercise due skill and care in his dealings by itself is not a default. Shri Bajaj at that time was not declared a persona non grata to the securities market. But the subsequent developments and failure to take cognizance of the same, as stated earlier, and failure to act prudently, is certainly a failure on the part of the Appellant.
The fact that Shri Harinarayan Bajaj’s son was a defaulter broker and as such the Appellant should not have traded for Shri Harinarayan Bajaj, in the absence of adequate evidence to show that Shri Harinarayan Bajaj was also a party to the said default, is difficult to accept. The charge that the Appellant allowed Shri Bajaj to take position beyond his financial position and the Appellant traded in the scrip of ARBL scrip beyond his own financial capacity has been demonstrated from the fact that Shri Bajaj could not meet his obligation to the Appellant and the Appellant was declared defaulter and was disabled to trade in that context. In this context I agree with the finding arrived at by the Inquiry Officer that the Appellant allowed Shri Bajaj to take osition beyond his financial capacity and the Appellant traded in the scrip of ARBL beyond his capability. The relevant portion from the inquiry report has already been extracted in the earlier part of this order. There is nothing on record warranting to take a different view on the issue.
With reference to the second charge that the Appellant aided and abetted Shri Bajaj in creating a false market in the share of ARBL has been established from the conduct of the Appellant himself as reflected from the factual position explained by the Inquiry Officer, as stated earlier in this order. The Inquiry Officer has marshelled convincing evidence in this regard.
The Appellant’s contention that since he has been disabled from carrying on business in BSE with effect from 16.3.2001 the suspension awarded by the Respondent vide order dated 12.6.2002 be treated to have come into operation with effect from 16.3.2001 and not from 27.6.2002 is not possible to accept. The Exchange had declared the Appellant as a defaulter on account of his inability to meet his financial obligations to the Exchange and it was in that context his trading terminal was disabled. The Respondent’s order is on an entirely different footing. The Respondent’s charge is that the Appellant had failed to exercise certain requirement of the Stock Broker Regulations and that he had also acted in violation of the provisions of the FUTP Regulations. In the context of the charges having provided the impugned order was made. Therefore it can not be said that since BSE had already disabled the Appellant from trading, the Respondent’s order disabling him from trading by suspending his certificate of registration should be treated to have come into operation from 16.3.2001 is not acceptable.
For the reasons stated above the order is to be sustained.
The appeal dismissed. Sd/-
Date: September 18, 2003