IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

 

Appeal No.7/2006

  

Date of Decision

20.03.2006

 

 

In the matter of:

 

N.S.M. Securities Pvt.Ltd.,	Appellant – Represented by Mr. Bharat Merchant, Advocate
Versus
The Securities and Exchange Board of India	Respondent – Represented by Mr.  Ravi Hegde, Advocate along with Mr. Paras Parekh  for the Respondent.

 

Coram:

 

 

          Justice N. K. Sodhi, Presiding Officer

          C. Bhattacharya, Member

          R. N. Bhardwaj, Member

 

Per:   C. Bhattacharya, Member

 

 

          Heard the counsel for both the parties. 

         

          Securities and Exchange Board of India (for short SEBI) had conducted an investigation into the alleged price manipulation in the scrip of Mefcom Capital Markets Ltd., (for short “MCML”) during the period January, 1994 to February, 1995.  The investigations was conducted after some complaint was received by SEBI in 1998.  SEBI’s investigation revealed that during the period covered under investigation the price of the scrip of MCML had moved from Rs.12/- in January, 1994 to about Rs.155/- in January, 1995 i.e. immediately prior to the public-cum-rights issue which opened on February 1, 1995.  SEBI’s investigations further revealed that the appellant NSM Securities Pvt.Ltd., had dealt in the securities of MCML  through Mefcom Securities and Stock Brokers Ltd., (for short MSSB) which is an associate of MCML .  In view of this, it was alleged that the appellant had aided the promoters of MCML in price manipulation of the scrip prior to the opening of the public-cum-rights issue.

          An  Enquiry Officer  was appointed by SEBI in May, 2003.  The Enquiry Officer  after conducting the enquiry in terms SEBI (Procedure for Holding Enquiry by  Enquiry Officer  and Imposing Penalty) Regulations, 2002  found that the appellant had traded in the scrip of MCML from 12/9/1994 onwards.   The  Enquiry Officer  concluded that the year long  trading activity in the scrip of MCML immediately prior to the public-cum-rights issue of February, 1995  and the “attendant circumstances” should have aroused suspicion of the appellant.   Therefore,  the Enquiry Officer  concluded that it cannot be said that the broker had exercised due skill and diligence for its  transactions  in the scrip of MCML.  It was alleged that the appellant had, therefore, violated the code of conduct as specified in Schedule II read with regulation 7 of the Securities and Exchange Board of India (Stock Brokers & Sub-brokers) Regulations, 1992.  The Enquiry Officer  recommended a penalty of suspension of certificate of registration  of the appellant for a period of thirty days.

 

          A copy of the enquiry report was forwarded to the appellant with a show cause notice dated September 21, 2004 asking it to show cause as to why action as recommended by the Enquiry Officer should not be taken against it.  The appellant replied to the said show cause notice vide its letter dated October 13, 2004 and submitted, inter alia, that it has no direct or indirect connection with MCML and,  that,  it was not involved in any manipulation of the price of the scrip and that by merely having 4-5 transactions during the period September, 1994 to February, 1995 it did not violate any provision of the code of conduct.

 

          The Whole Time Member of SEBI observed that the same submissions were also earlier made by the appellant to the Enquiry Officer and the Enquiry Officer after having considered these submissions made before him, had recommended the penalty of suspension of certificate of registration   of the appellant for a period of thirty days.  The Whole Time Member, therefore, passed an order dated 29/12/2005 suspending the certificate of registration of the appellant as a broker member of Delhi Stock Exchange for a period of thirty days.  Being aggrieved by this order the appellant has filed the present appeal.

 

          It is not  in dispute  that the appellant had traded in the shares of MCML for the first time on 9/12/1994 and total number of transactions prior to the public-cum-rights issue were only 5 and the volume was also not substantial. The total volume of shares bought and sold by the appellant was 2900 shares only. As such, the allegation of price manipulation was not sustained during the enquiry.  It needs to be noted here that during the relevant period trading was carried on in Delhi Stock Exchange in an “open outcry” system.  The appellant has contended that in the “open outcry” system it was not possible to know prior to the transaction, who the counter party would be.  This factual position has not been seriously contested by the respondent.  The trading volume of the appellant constituted only 3.42% of the total trade volume in the scrip of MCML during the relevant period.  As such, it was a very insignificant portion and by trading in such insignificant volume it was not possible for it to cause any market manipulation.  However, the Enquiry Officer    had concluded that the appellant had failed to comply with Clause A(1), (3) and (4) of the Code of Conduct as specified in Schedule II read with regulation 7 of the Securities and Exchange Board of India (Stock Brokers & Sub-brokers) Regulations, 1992.    These clauses relate  to the general  conduct and requires a stock broker to desist from market manipulation and malpractices. 

 

          The allegation of market manipulation has not been sustained and no other malpractices also has been observed except that the appellant in the erstwhile “open outcry” system had bought and sold scrip of MCML  through MSSB who were associates of MCML.  The learned counsel for the respondent also does not contest the factual position that it is plausible that the appellant’s employee could not identity the employee of MSSB in the trading ring and it was only after “sauda” was made did the appellant come to know that the counter party broker was MSSB.   Trade  transaction in the scrip of a company through its associated broking firms is not prohibited.  Merely because the appellant had 4-5 such transactions during the two months  period in the scrip of MCML does not lead us to believe that its action was violative of the Code of Conduct as specified in Schedule II read with regulation 7 of the Securities and Exchange Board of India (Stock Brokers & Sub-brokers) Regulations, 1992. 

          In the above view, the appeal is allowed and the impugned order is set aside. No order as to costs.

                                                                                                Sd/-

Justice N. K. Sodhi

                                                    Presiding Officer.

                                                                                                Sd/-

C. Bhattacharya

                                                Member.

                                                                                                Sd/-

                                      R. N. Bhardwaj,

                                                Member

 20/03/2006.

Smn/13/3