IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No: 63 of 2002
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Date of Hearing
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21/07/2004
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Date of Decision
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10/08/2004
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In the matter of
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Appellant – Represented by:
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Crown Consultants (P) Ltd.
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Mr. Shyam Diran, Advocate
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Versus
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Securities and Exchange Board of India
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Respondent- Represented by
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Mumbai
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Mr. Kumar Desai, Advocate
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CORAM
Dr. B. Samal, Member
Shri N.L. Lakhanpal, Member
Per: Shri N.L. Lakhanpal, Member
1. The Securities and Exchange Board of India noticed excess volatility in the scrip of M/s. Amara Raja Batteries Ltd., (hereinafter referred to as ‘ARBL’). The price of this scrip at BSE rose from Rs. 91/- in October, 2000 to Rs. 205/- in January, 2001 and onwards to Rs. 320/- on March, 8, 2001. The volumes also similarly went up from 50,000 - 60,000 per day in October, 2000 to 8 – 15 lakhs shares per day in March, 2001. The average trading of the scrip of ARBL from January to March, 2001 was in the range of 10-15 lakhs shares per day and this constituted approximately 30% of the free floating stock of ARBL. The investigations revealed that Shri Harinarayan Bajaj and his son Shri Rahul Bajaj were the predominant traders in the scrip of ARBL during the relevant period. Investigations further revealed that the Bajaj duo started making use of different trading cycles of the Bombay Stock Exchange and the National Stock Exchange to shift their positions from one exchange to another. This shifting of positions started with volumes of about 5 lakhs shares and increased to 11 lakh shares in Settlement No.9 of NSE. Since they did not have requisite funds for delivery and subsequently, even for the margins, the price crashed and there was a payment crisis. In this process of manipulation of the market, the Bajajs were assisted by a number of brokers and the appellant was found to be one of them who had purchased 15.65 lakh shares and sold 14.45 lakh shares of ARBL from November, 2000 to March, 2001. The proceedings against the appellants resulted in the impugned order being passed against them suspending their certificate of registration for a period of three months. Being aggrieved, the appellants have filed the present appeal.
2. Besides having transacted a huge number of shares of ARBL during a short span of time, the investigations had further revealed that most of these transactions were executed by the appellant with a sub-broker M/s. Bid Securities Pvt. Ltd., who was not registered with SEBI as a sub-broker of the broker member. The investigations had also shown that almost all the trades of Bid Securities Pvt. Ltd., were on behalf of Shri Harinarayan Bajaj, the main person behind this entire manipulation. An enquiry officer was therefore appointed on June 18, 2001 to go into these allegations against the appellants. Enquiry officer, however, found that there was no adequate evidence to hold that the appellant was aware of M/s. Bid Securities Limited acting on behalf of Shri Harinarayan Bajaj. The enquiry officer also found that the appellant had dealt with M/s. Bid Securities Limited as a client and not as a sub-broker. The enquiry officer, however, found that the appellant failed to exercise due skill and care in his dealings with the client in the scrip of ARBL as mandated by clause (a)(2) of Schedule II of the Code of Conduct prescribed under Regulation 7, Schedule II of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992. The enquiry officer therefore recommended that the said certificate of registration granted to the appellant be suspended for a period of three months. After further show cause notice and personal hearing, the respondent, SEBI, passed the impugned order accepting the recommendation of the enquiry officer.
3. The charge against the appellant therefore boils down to failure to exercise due skill and care. This charge is sought to be substantiated by the fact that he allowed the client to take positions in respect of transactions in respect of ARBL shares which were beyond the client’s financial capability. As further proof of lack of due skill and care, the learned Counsel for the respondent pointed out at the time of hearing that in the client registration application form prescribed for the brokers by SEBI, the columns pertaining to net worth and market value of the portfolio of the client had been left blank. It is argued on this basis that the lack of this vital information probably handicapped the appellant in fixing a reasonable exposure limit for the client M/s. Bid Securities Pvt. Ltd. When Bid Securities Pvt. Ltd., committed a huge default, the appellant was left with the only option of going in for arbitration proceedings. Against this the learned Counsel for the appellant argued that he had, not only in this case but in respect of each and every client through out his business never violated any rules, regulations or byelaws of NSE, BSE or SEBI and that his services had always been appreciated by all statutory authorities as well as Bankers and Brokers’ Association. According to the learned counsel, the appellant had shown absolute skill and care in dealing with this client by keeping more than adequate margins at every stage of the transactions. The learned Counsel drew our attention to the fact recorded in the impugned order that all pay outs in this case had been through account payee cheques and that no third party fund transfers had been made. Regarding certain columns in the client registration application form having been left blank, the learned counsel took us through their own formal assessment (Exh. 18) which they had conducted in respect of the networth of M/s. Bid Securities Pvt. Ltd., to show that the exposure limits granted to this client were well within prudent limits and that it was unfortunate that the client had defaulted in payments. According to the appellants, even after the default he had filed a police complaint as well as arbitration proceedings against the client. The learned counsel therefore argued that he was in fact a victim of the entire deception and that he had ensured full payment from his own funds to ensure the integrity of the market. The learned counsel finally drew our attention to several other cases in respect of the same scrip, ARBL, where the matters had been closed by mere issue of warning as also cases in which the penal orders passed by the respondents had been reversed by this Tribunal.
4. We have carefully gone into the facts on record as well as the pleadings on both sides. As mentioned earlier the only charge against the appellant is lack of due skill and care. We are in total agreement with the appellant that this charge is not substantiated by any evidence whatsoever. A few blank columns in a relevant form, which again is not mandatory, cannot constitute evidence by any standard of proof. However, even assuming that the appellant to be guilty of the charges, he has not let this so called lack of skill and care affect the integrity of the securities market in any manner and has paid for such lack with his own money. In fact the logical outcome of the Enquiry Officer’s findings to the effect that the appellants dealt with M/s. Bid Securities Pvt. Ltd. as clients and not as sub-brokers and that, the appellants were unaware of M/s. Bid Securities Pvt. Ltd. acting on behalf of the Bajaj family should have been an honourable acquittal. Unfortunately that has not happened and it has fallen on us to undo the injustice done to the appellants. Accordingly, we set aside the impugned order. No order as to cost.
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(Dr. B. Samal)
Member
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(N.L. Lakhanpal)
Member
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Place: Mumbai
Date:10.8.2004
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