ORDER
UNDER RULE 5 OF THE SEBI (PROCEDURE FOR HOLDING
ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995
AGAINST
M/S. GALAXY BROKING LIMITED
(PAN NO. AABCG5457B)
1. The present proceedings are primarily concerned with the question of the contumacious conduct of M/s Galaxy Broking Limited (for brevity’s sake, hereinafter referred to as Galaxy) who despite having been a registered entity, is alleged to have committed default in complying with the direction issued by the securities market regulator.
2. The direction in question arises from the order dated October 24, 2005 passed by a Whole Time Member of the Securities and Exchange Board of India (SEBI) who inter alia restrained Ritedeal Trading Co. Pvt. Ltd. (for brevity’s sake, hereinafter referred to as Ritedeal) and its directors; Mr Ajit Suryavanshi (AS) and Mr Santosh Rhidas Jagtap (SRJ) among several other promoters and directors of M/s Mega Corporation Ltd and several other clients dealing in the said scrip from buying, selling or dealing in the securities of the said scrip, directly or indirectly, till further directions. A copy of this order was duly forwarded to the concerned parties for necessary compliance. The order was effective from October 24, 2005.
3. Despite the same, Galaxy executed sell transaction for Ritedeal involving 14000 shares of Mega Corporation Ltd. on November 16, 2005.
4. In view thereof, adjudication proceedings were ordered against Galaxy by SEBI on May 29, 2006 and in that context I was appointed as the Adjudication officer to enquire and adjudge under Section 15HB of the SEBI Act, 1992 their alleged failure to exercise the due skill, care and diligence required of them as a registered broker and acting in defiance of a directive issued by the Board.
5. As per the norm, Galaxy was show caused vide notice dated June 08, 2006. In their reply dated July 13, 2006, while admitting to being aware of the restraint order, Galaxy agreed purchasing 15,000 shares of Mega Corporation Limited on September 21, 2005 for their client; Ritedeal and selling 14,000 shares in the said scrip on November 16, 2005 for the same client, in contravention of the said order but attributed the same to ignorance on the part of their BOLT operator who was stated to be unaware that AS is the director of Ritedeal. It was reiterated that this default was neither willful nor of a repetitive kind and hence a lenient view be taken. They also requested for a pre-decisional hearing.
6. Accordingly a personal hearing was granted on August 25, 2006. On the said date, Shri Anil Gandhi one of the five directors of Galaxy appeared on behalf of Galaxy and while reiterating the contentions earlier advanced, stated that their office was a 100 sq. feet premise with six dealing operators. He also admitted receiving the order of SEBI on time and pasting the same on their notice board well within time but emphasized that the impugned trade was done on account of a human error that was neither intentional nor willful. Shri Gandhi pleaded that Galaxy was a small time broker presently facing losses and that their trading rights had already been suspended vide an interim ex-parte order of SEBI dated January 24, 2006 which was shortly due to come up for final hearing before the Whole Time Member. He undertook to submit the copy of the interim order and requested that a lenient view be taken.
7. The order was thereafter forwarded vide letter dated August 29, 2006. I have also noted that the said interim order stands confirmed subject to certain modifications which are not discussed here as they are unrelated to the present proceedings.
APPRECIATON OF FACTS:
8. I have examined the operative part of the order of the Whole Time Member, SEBI and the submissions urged before me.
9. The undisputed facts related to this case are as follows:-
· Several promoters and directors of Mega Corporation Limited and several clients including Ritedeal and its directors; Mr Ajit Suryavanshi (AS) and Mr Santosh Rhidas Jagtap (SRJ) were found to be dealing in the scrip of Mega Corporation Ltd in a manner meant to create artificial volumes and a rise in the price of the said scrip.
· As an interim measure, SEBI had passed an order dated October 24, 2005 which inter alia directed Ritedeal and its directors; AS and SRJ not to buy, sell or deal in the securities of Mega Corporation Ltd, directly or indirectly, till further directions.
· The order in question was posted on the website of SEBI on October 24, 2005 and was also communicated to the media through a press release on the same day.
· The passing of the said order was also communicated vide notice dated October 25, 2005 by the BSE to its broker members for compliance of the order of SEBI.
· SEBI sent a letter dated October 24, 2005 to Galaxy, being the broker of Ritedeal, with an advise to deliver the copy of the order, duly enclosed, to Ritedeal and the other entities and to send the acknowledgement/proof of the delivery at the earliest.
· SEBI also addressed another letter dated October 24, 2005 to Ritedeal which was duly acknowledged by Shri S R Jagtap, the director / authorized signatory of Ritedeal for necessary compliance.
· Galaxy vide their letter dated December 20, 2005 forwarded the acknowledgement of the letter earlier sent to them by SEBI.
10. A series of correspondence was also exchanged between various parties, copies of which are on file and are listed below:-
· A letter dated November 25, 2005 sent by Galaxy to the BSE stating that the transactions in the scrip of Mega Corporation on November 16, 2005 were done unknowingly as their BOLT operator was stated to be unaware of the fact that Ajit Suryavanshi was the director of Ritedeal.
· Letter dated November 29, 2005 sent by Galaxy to the BSE confirming that their client Ritedeal had purchased 15,000 shares of Mega Corporation on September 29, 2005 and that 14,000 of those shares, lying with them in their demat account were sold by the client on November 16, 2006.
· Email sent on December 05, 2005 by an officer of BSE to another officer of BSE confirming that during their scrutiny in the case of Mega Corporation, they had noted that the member Galaxy had dealt on behalf of the debarred client; Ritedeal, whose director is Ajit Suryavanshi.
11. These documents establish the finding that the restraint order was suitably conveyed to all the parties and that all concerned entities including Galaxy were fully aware of the restraint order of SEBI and that there was no scope for misinterpretation of the order.
12. Despite the same, Galaxy executed transactions for an entity restrained to deal in the securities market i.e. Ritedeal and admitted to the said act, but attributed the same to a mistake committed by their dealing operator as regards not being aware that AS was the director of Ritedeal. Notwithstanding these contentions, the fact remains that the order dated October 24, 2005 inter alia directed Ritedeal and also its directors; AS and SRJ not to buy, sell or deal in the securities of Mega Corporation Ltd, directly or indirectly, till further directions. Thus with AS also being an entity restrained to deal in the scrip of Mega Corporation Ltd effective from October 24, 2005, the same should not have made any difference as there was no question of dealing in the said scrip for either AS or Ritedeal. It is however not the case of Galaxy that there was any ambiguity or indefiniteness in the order, which had to be obeyed. In any case, the direction of the regulator, issued by a Whole Time Member of SEBI was crystal clear and did not permit any other interpretation.
13. To my mind, this appears to be a futile attempt to shift the responsibility and take shelter behind the act of their employee, in as much as there are several facts which completely nullify the alleged claim of bona fides made by Galaxy.
14. A brief perusal of the contents of the orders dated October 24, 2005 and January 24, 2006 passed by the Member; SEBI, throws some light on such a claim as also the track record of the entity in question.
15. The order dated January 24, 2006 while suspending the certificate of registration of Galaxy with a direction not to buy, sell or deal in securities either directly or indirectly till further directions, which order was subsequently confirmed, mentions the names of the directors of Galaxy as Shri Sanjay Munhall Sanghavi, Shri Anil Amrutlal Gandhi, Shri Yogesh Girdharilal Pandya, Shri Arvind Mulraj Udeshi and Shri Subhash R Ashar. While highlighting the inter-relationship between the various parties, the order brings out the nexus between Ganesh Raut and Ritedeal, both of whom are clients of Galaxy and also stated to be members of the Anil Gandhi group and the ILSF group.
16. The order dated October 24, 2005 of SEBI passed under Sections 11B and 11(4)(b) of the SEBI Act, 1992 in the matter of price manipulation and creation of artificial market in the shares of Mega Corporation Ltd brings out the fact that some entities including several clients were found to be dealing in the shares of Mega Corporation Ltd in a manipulative manner.
17. Most of these entities were stated to be connected to each other in terms of common address, common contact number or association through client companies of which individuals are directors. Ritedeal, being one of the entities dealing in the said scrip as a client was said to share the same phone number as that of another client; Ganesh Raut while the directors of Ritedeal i.e SRJ and AS were also dealing as clients in the said scrip. This is just a sample of the inter relationship existing amongst the various entities dealing in the said scrip.
18. The logical conclusion of Galaxy executing transactions that were restrained can thus be attributed to the close nexus existing between the parties which probably compelled them to close or complete some pre-arranged deals. It thus cannot be said by any stretch of imagination that there was no mens rea involved. The facts and situations clearly show to the contrary.
19. Even if I have to accept the explanation of Galaxy that they had not willfully acted in defiance of the order of SEBI, that however, does not absolve them of the liability incurred on account of their actions which renders them liable for action under the provisions of Section 15 HB of the SEBI Act, 1992 and prescribes the penalty upto Rs.1 crore to be levied in cases of non compliance with any provision of the Act, the rules or the regulations made or directions issued by the Board for which no separate penalty has been provided.
20. Besides, Galaxy being a registered entity of SEBI was bound by the Code of Conduct under which they are registered and ought to have acted accordingly. Clause A(2) of the Code of conduct read with Schedule II of Regulation 7 of the Broker Regulations mandates all stock brokers holding a certificate of registration to act with due skill, care and diligence in the conduct of all his business. Their failure to exercise even this basic due diligence gives rise to a suspicion that they had actively colluded with the perpetrators.
21. The failure to abide with this code of conduct by Galaxy stands established by their failure to abide by the directions issued by the market regulator and executes transactions for an entity restrained from operating in the market, which besides rendering the main party liable for contempt also invites other repercussions for them as the supporting entity.
22. Before fixing the quantum of penalty that is commensurate with the charge established against Galaxy, it would be necessary to also refer to certain factors as enumerated under Section 15J of the SEBI Act, 1992 which also find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 i.e. the amount of disproportionate gain or unfair advantage made as a result of the said default, the amount of loss caused to the investors and the repetitive nature of default.
23. Galaxy have tried to impress upon the fact that they had only earned Rs.815/- as brokerage in these deals executed on behalf of their clients and had not made any disproportionate gains from the dealing nor taken any unfair advantage or caused any loss to any group of investors.
24. Such arguments do not impress me. I cannot lose sight of the fact that SEBI was exercising jurisdiction conferred upon it by the statute to inter alia regulate the securities market and protect the interests of the investors operating in the market. Hence sufficient regard has to be given to the mandate issued by SEBI from time to time especially when the same concern the rights and interests of investors as also the sound and smooth functioning of the capital market. It is clear that if such orders are violated, the interest of the investors is jeopardized. Hence sufficient cognizance has to be taken of such disregard and suitable liability should be fixed there upon or else, the entire purpose of enactment of the statute would become redundant.
25. In view thereof, although I am inclined to hold that the penalty need not be imposed in terms of the exact quantum specified in Section 15HB of the Act, imposition of a penalty is very much necessitated. This will set an example for those who have a propensity for disregarding orders issued by the regulator.
PENALTY
26. On a judicious exercise of the discretion conferred upon me, bearing in mind the fact that Galaxy is a registered entity and on account of the same ought to have acted with a fair degree of integrity, which they failed to do, I in exercise of the powers conferred upon me under Rule 5 of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, am of the considered view that for the aforementioned violation, it would be appropriate to impose a penalty of Rs. 10,00,000/- (Rupees Ten lakhs only) on M/s Galaxy Broking Limited whose PAN No. is AABCG5457B.
27. The penalty amount shall be paid within a period of 45 days from the date of receipt of this order through a cross demand draft drawn in favour of “SEBI- Penalties remittable to the Government of India and payable at Mumbai which may be sent to Smt Barnali Mukherjee, Deputy General Manager, Securities and Exchange Board of India, SEBI Bhavan, Plot No.C4-A, G Block, B Wing, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.
PLACE: MUMBAI G. BABITA RAYUDU
DATE: JULY 30, 2007 ADJUDICATING OFFICER