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In the matter of Amgis Holdings Private Limited

May 05, 2006
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Orders : Orders of SAT

IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

 

Appeal No.  209 of 2004

 

Date of Decision

05/05/2006

 

 

Amgis Holdings Pvt. Ltd.

 

……Appellant

Versus

 

 

 

Securities & Exchange Board of India

 

……Respondent






 

Present :  Mr. Zal T. Andhyarujina, Advocate with Mr. Vinod Parekh,                      Advocate for the appellant

                  Mr. V.N. Shingnapurkar, Advocate for the respondent           

 

Coram:

 

          Justice N.K. Sodhi, Presiding Officer

            C. Bhattacharya, Member

            R. N. Bhardwaj, Member

 

Per:  Justice N.K. Sodhi, Presiding Officer

            This appeal under Section 15T of the Securities and Exchange Board of India Act, 1992 (for short the Act) is directed against the order dated 21.9.2004 passed by the Securities and Exchange Board of India (for short the Board) suspending the certificate of registration of M/s. Amgis Holdings Pvt. Ltd. (the appellant) for a period of four months for violating the code of conduct prescribed for brokers under the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter called the Regulations) and also for violating the circulars issued by the Board.  Facts giving rise to this appeal which are not in dispute lie in a narrow compass and these may first be noticed.

   2.            The appellant before us is a broker registered with the National Stock Exchange (NSE).   The Board received complaints alleging price manipulation in the shares of M/s. Vakrangi Software Ltd. (for short the Company) by Sri Harshad Mehta in connivance with certain other entities and brokers including the appellant.  Investigations were held and it transpired that the price of the share had increased from Rs. 10/- in September 1999 to Rs. 152/- by the end of that year and it further rose to Rs. 597/- by March 2000.  The investigations further revealed the involvement of certain brokers and other intermediaries of the stock market.  On the basis of the investigations conducted by the board separate enquiries were held against those found to have indulged in the price manipulation of the shares of the Company.  The appellant is one of them.  A detailed enquiry was held against the appellant and an enquiry officer appointed who issued a show cause notice.  A reply to the show cause notice was filed and after considering the same the enquiry officer submitted his report in which he found that the appellant had traded off market more than once in the shares of the Company worth more than Rs. 25 lacs and more than 10,000 shares in volume.  It was also found that the appellant did not report the off market transactions to the Stock Exchange where it was registered as a broker.  The appellant was found to have traded in the shares of the Company in large quantities during the period when the price thereof had risen from Rs. 10/- to Rs. 597/-.  Since the appellant had on some earlier occasions as well been found manipulating the price of the shares of some other companies in connivance with Sri Harshad Mehta, the enquiry officer was of the view that the appellant was including in such activities time and again and recommended the suspension of its certificate of registration for a period of two years.  On receipt of the enquiry report the Board issued a notice dated 15.10.2003 to the appellant along with a copy of the enquiry report and called upon it to show cause why action not be taken against it as recommended by the enquiry officer.  The appellant filed its reply to the show cause notice which was considered by the Board.  The Board found that the appellant had traded in the shares of the Company in large quantities during the aforesaid period when the price of the share had gone up and that it traded on behalf of different clients.  The appellant had executed on 25/10/1999 transactions on behalf of two clients namely Harsh Pranav Securities Pvt. Ltd. and Tanul Trading Pvt. Ltd. when it purchased 3 lac shares for Harsh Pranav Securities and sold 3 lac shares on behalf of Tanul Trading Pvt. Ltd.  These transactions were off market and the payments were made on different dates in December,1999 long after the settlement period.  The shares were also delivered long after the prescribed period in December that year.  Since these transactions were neither executed through the Stock Exchange nor were they done as spot transactions, the provisions of the Securities Contracts (Regulation) Act, 1956 (for short the 1956 Act) stood violated.  Similarly, the appellant purchased 3 lac shares of the Company on behalf of S.J. Impex and also sold 3 lac shares on behalf of Tanul Trading Pvt, Ltd. through settlement no. 43 of 1999 and in these transactions also no payment was made against the delivery within the time stipulated by Section 2(i) of the 1956 Act.  Several other transactions of the same kind were executed by the appellant on behalf of different clients as has been noticed in the impugned order.  Since the learned counsel appearing for the appellant did not dispute any of these transactions it is not necessary to refer to all these.  On a consideration of the entire material on record including the transactions executed by the appellant, the Board came to the conclusion that rise in the price of shares of the Company could not be attributed to the appellant since the transactions were not carried through the stock exchange mechanism.  It further found that the transactions were not spot transactions as they were not settled within the stipulated time and therefore, the clients were responsible for violating the provisions of the 1956 Act and not the broker.  The appellant was given a benefit of doubt in this regard.  It was, however, found that the appellant acted as a broker while executing these transactions on behalf of various clients and since they were admittedly off market the appellant should not have executed them as it was registered as a broker with NSE and the shares of the Company were traded only on the Bombay Stock Exchange (BSE).  The Board also found that the execution of the transactions was in violation of the circular dated 14.9.1999 issued by the Board to the executive directors and managing directors of all the Stock Exchanges in the country.  The action of the appellant in executing these transactions was also held to be in violation of the code of conduct prescribed by Regulation 7 read with Schedule II of the Regulations.  Taking a lenient view in the matter, the Board by the impugned order imposed the penalty of suspending the certificate of registration of the appellant for 4 months.  Hence this appeal.

   3.            We have heard the learned counsel for the parties.  It may be mentioned at the outset that the learned counsel appearing for the appellant did not dispute the correctness of any of the transactions referred to in the impugned order and conceded before us that these had been executed.  It was contended on behalf of the appellant that the Board has no power to issue directions of the kind referred to in the circular dated 14.9.1999 and that there was no justification for issuing such a circular and therefore it was not necessary for the appellant as a broker to follow the same.  The learned counsel for the appellant also contended that off market transactions were a matter of practice followed in all stock exchanges and since the same were not barred by any law it was open to the appellant to transact sale and purchase of shares off market and that it did not violate any provision of the code of conduct prescribed by the Regulations.

   4.            Having given our thoughtful consideration to the contentions advanced on behalf of the appellant we do not find any merit in either of them.  As regards the power of the Board to issue directions, one can safely refer to provisions of Section 11B of the Act which is reproduced hereunder for facility of reference.

“11B. Power to issue directions. - Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,—

        (i) in the interest of investors, or orderly development of securities market; or

        (ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; or

        (iii) to secure the proper management of any such intermediary or person, it may issue such directions,—

        (a) to any person or class of persons referred to in section 12, or associated with the securities market; or

        (b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market.”

 

   5.            A reading of the aforesaid provisions would leave no room for doubt that the Board in the interest of the investors or orderly development of the securities market can issue directions to any person or class of persons referred to in Section 12 or associated with the securities market as may be appropriate in the interest of investors in securities and the securities market. The Board is a statutory body constituted under the Act with a view to regulate the securities market and to protect the interest of the investors.  The Regulator in its wisdom thought that off market transactions which in common parlance are called negotiated deals where the buyer and the seller negotiate the price of the scrip de hors the exchange mechanism lack transparency and do not lead to price discovery. The Board therefore issued amongst others, the following direction by way of a circular dated 14.9.1999 the relevant part of which reads as follows.

“Please refer to our earlier circulars dated March 31, 1997, August 04 & 12, 1998 and January 14, 1999 relating to negotiated deals.  The following decisions have been taken based on the recommendation of the Committee on Negotiated Deals, which met on September 01,1999.

1.           All negotiated deals (including cross deals) shall not be permitted in the manner prescribed in circulars mentioned above and all such deals shall be executed only on the screens of the exchanges in the price and order matching mechanism of the exchanges jut like any other normal trade.

Provided, however, that Foreign Institutional Investors (FIIs) can avail of the provisions of the special bargains on the exchanges in accordance with their bye-laws or obtain suitable exemptions from exchanges for purchases or sales between FIIs in such companies where the ceiling of FII investment of 24% or 30% as the case may be, has been reached.”

It cannot be disputed that the stock exchange mechanism is meant to discover the best possible price of a scrip and that negotiated deals of the kind executed by the appellant not only lack transparency but also run against the basic concept of a stock exchange which is meant to bring together a large number of buyers and sellers in an open manner.  It is worth mentioning that the stock exchange provides a platform where both buyers and sellers come to trade and transactions take place without one knowing the other.  The object of such a platform is to secure a fair and transparent discovery of price of a security based on the demand and supply and we cannot lose sight of the fact that every transaction establishes the price of the scrip. Negotiated deals would militate against this concept.  The circular directing that all negotiated deals shall be executed only on the screens of the exchanges in the price and order matching mechanism of the exchanges just like any other normal trade is a part of the regulatory process and in the interest of the investors, and therefore, it is within the competence of the Board to issue such directions.

   6.            We may hasten to mention here that with effect from the date of the issuance of the aforesaid circular all negotiated deals have to go through the stock exchange mechanism and the stock exchanges have made special arrangements for such deals.  Since off market transactions lack transparency there was sufficient justification for the Board to issue the aforesaid circular and it is not open to any broker including the appellant to say that such transactions could still be executed off market.  Moreover, the directions issued by the Board through the circular are also binding on all intermediaries of the securities market including brokers because any one who violates the direction can suffer a penalty under Chapter VIA of the Act.  Since non-compliance with the directions leads to the imposition of penalty, it is clear that the directions issued by the Board are binding on all concerned and every intermediary including the brokers are bound to follow the same.

   7.            We may now deal with other contention raised by the appellant.  It is true that there was a practice in the securities market where off market transactions were executed by the brokers on behalf of the clients.  As already observed this practice lacks transparency and does not lead to true price discovery of the scrip and therefore the Board as an expert body issued the aforesaid direction banning such transactions.  Admittedly the appellant executed the transactions after the issuance of the circular dated 14.9.1999 and therefore violated the circular issued by the Board.  Not only this, the appellant is a member of the NSE where it is registered as a broker. Admittedly it is not registered as a broker with the BSE.  It, therefore, follows that the appellant can trade in the scrips which are traded/listed on the NSE alone and cannot trade in the stocks of any company which is listed on the BSE or any other stock exchange.  It is common case of the parties that the shares of the Company are listed only on the NSE and not on BSE.  The appellant could not therefore trade in the scrip of the Company on the BSE and what it could not do lawfully through the stock exchange mechanism it has done in an off market transaction.  Apart from the fact that such transactions have been barred by the Board through the aforesaid circular, we are of the view that executing such transactions would be unethical on the part of a broker who is registered on the NSE and trades off market in regard to the shares listed on the BSE.  The Board was, therefore, right in observing that the appellant should have refrained from entering into transactions outside the exchange mechanism in regard to the shares which were listed on the BSE.  The Board were equally justified in observing that the appellant had no business to execute transactions in huge amounts which were off market when the same had been prohibited by the Board.  In this view of the matter, no fault can be found with the impugned order.

   8.            No other point was raised.

   9.            In the result, the appeal fails and the same stands dismissed with no order as to costs.

 


sd/-

Justice N.K. Sodhi
Presiding Officer

sd/-

C. Bhattacharya
Member

sd/-

R.N. Bhardwaj
Member