In the matter of NAM Securities Limited

IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

 

 

Appeal No: 153 of 2004

  

 

 

 

 

 

CORAM

 

          Justice Kumar Rajaratnam, Presiding Officer

          C. Bhattacharya, Member

          R.N. Bhardwaj, Member

         

 

 

Per:    R.N. Bhardwaj, Member

 

 

1.                  Appeal taken up for disposal with the consent of both sides.

2.                  The appeal is against the impugned order passed by the respondent dated 19/08/2004 the operative portion of which reads as under:

“30.     Therefore, in exercise of powers conferred on me vide Section 19 of the Securities and Exchange Board of India Act read with Regulation13(4) of the SEBI (Procedure for Holding Inquiry by Enquiry Officer and Imposing Penalties) Regulations, 2002, I hereby order that the certificate of Registration No. INB 230771039 of M/s. Nam Securities Ltd., member, National Stock Exchange of India Ltd., be suspended for a period of six months.”

3.                  By an interim order passed by this Tribunal on 08/09/2004 stayed the operation of the impugned order till 10/10/2004 which was subsequently on 06/10/2004 extended till the disposal of the appeal.

4.                  The brief facts of the case are as follows:  SEBI conducted an investigation into the dealings in the shares of Eider Infotech Limited (formerly known as Eider Telecom Ltd.)  (hereinafter referred to as ‘EIL’). The scrip of EIL was not very active at both NSE and BSE during the period September, 1998 to August, 1999. During January, 1998 to August, 1999 only 200 shares were traded at BSE and 1800 shares were traded at NSE. However, the volumes increased from September, 1999 to March, 2000 at BSE to 6500 and at NSE 3,04,200 shares.  At NSE share price of EIL moved from Rs. 32/- as on 24^th November, 1999 to Rs. 292/- by the end of first week of 2000. The price recorded its highest of Rs. 800/- on 11/02/2000 at NSE. The total shares traded at the NSE during the period 1^st December, 1999 to March, 2000 was around 2,54,000 shares. 

5.                  SEBI vide its order dated 02/07/2002 appointed an Enquiry Officer who conducted an enquiry under Regulations 28(1) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 against NAM Securities Limited for its dealing in the scrip of EIL and for the alleged price manipulation in violation of provisions of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. The Enquiry Officer submitted his report on 03/11/2003.  A show cause notice was issued to NSL on 11^th November, 2003 enclosing a copy of the enquiry report. NSL submitted its written reply  to show cause notice on 31/12/2003. An opportunity of personal hearing was granted to NSL which took place on 06/02/2004 and written submissions were made before the member on 09/02/2004. The following findings were arrived at based on the enquiry report and other documents by the Member:

(i)                that NSL had contributed substantial trading volumes in the shares of EIL to the extent of 47% during the period September, 1999 to March, 2000.

(ii)             NSL had tendered shares in the auction conducted by NSE in successive settlements at higher price;

(iii)           NSL executed many artificial trades in which it placed both buy and sale orders for the same client and from the same terminal. 

(iv)            NSL had executed transactions with Share Plaza as the known client for themselves and Sanchit Financial Management Services;

(v)               NSL received funds from Eider Financial Services Ltd., a Group Company of EIL during the period of price manipulation to influence the price to EIL shares.

(vi)            During the period April to August, 2000 NSL placed orders with just one share at the circuit breaker limit and also did cross deals of one share each on successive higher rates thus leading to higher price.

6.                  The order was passed by the Whole Time Member, SEBI in exercise of powers conferred upon him vide Section 19 of the Securities and Exchange Board of India Act read with Regulation13(4) of the SEBI (Procedure for Holding Inquiry by Enquiry Officer and Imposing Penalties) Regulations, 2002, and ordered that the certificate of Registration No. INB 230771039 of M/s. Nam Securities Ltd., member, National Stock Exchange of India Ltd., be suspended for a period of six months

7.                  The learned counsel for the appellant submitted that the appellant company was a limited company incorporated on 05/07/1994. Its Board of Directors comprised of qualified professionals and it was always maintaining a high standard of integrity and fairness in its operations.  Since 2000 it was also a Depository Participant of National Securities Depositories Limited.  It was having 37 employees and 900 clients of capital market and about 4500 Depository Participant clients mostly from the remote areas of Punjab and Delhi. The appellant company achieved total turnover of Rs. 11,000 crore during 2003-04 and Rs. 7,500/- crore during 2004-05.

8.                  The learned counsel submitted that considering the total floating stock of EIL of approximately 53 lakhs shares in the market, the appellant’s total deliverable shares would come to only 1,25,500 shares which was less than 5.6%.

9.                  He submitted that EIL turnover was negligible in comparison to other traded stocks during the period.  The total equity of EIL was Rs. 20 crores approximately and equity shares were 2 crores of which 53 Lakhs was the floating stock. Against the floating stock of 53 lakhs, the total trading during 1999 to March, 2000 was 3,04,000 shares which constituted an average off 1300 shares per day. He submitted that such an insignificant volume of trade would not lead to market manipulation when the floating stocks of the scrip was 53 lakhs.

10.             The learned counsel for the appellant submitted that the fact of existence of software boom in the stock market during the period should have been taken into account by the Enquiry Officer and the Member before finalizing the report. Scrip of EIL was rising because it was taking the twin benefit of TMT boom. EIL had expansion and diversification plan. He pointed out to the annual report of EIL filed during the year 1999 which proposed issue of further capital, its diversification plan in infotech, major collaboration plans, acquisition / takeover plans. This was a fundamental change in the basic future structure of the company. He also pointed out that this report was published by Business Standard on 10/07/2000. The increase in price was also because of market perception of the sectoral growth.

11.             The learned counsel further submitted that the appellant company was not only dealing in the scrip of EIL but in several other scrips.  He submitted that the turnover in EIL was negligible i.e., less than 1% of its turnover in other scrips during the period under investigation. He submitted following information which is extracted as given below:

12.             During the months of investigation the appellant’s turnover in EIL was nil during the 3 months and less than 1% in other months. He further submitted that trading in EIL was very negligible on number of days compared to the total number of days of the period under investigation.  In the first period of 230 days only 42 days EIL was traded and during the second phase of investigation of 105 days, only for 8 days EIL was traded by the appellant.

13.             The learned counsel submitted that it was wrong to say that appellant tendered 1000 shares in auction in successive settlements at higher rates to trap the short sellers. He submitted that auction quantity of 1000 shares over a period of 7 months from September, 1999 to March, 2000 compared to the deliverable quantity 1,25,500 shares was insignificantly low and could not be considered as an attempt to trap the short sellers. As a matter of fact the appellant had been participating in the auction market in the normal course of its business since 1995. 

14.             The learned counsel submitted that it was not correct to say that appellant had executed many artificial trade in which he placed both the buy and sell orders for the same client during the period December, 1999 to August, 2000. He submitted under the automated NEAT system of NSE all the trades by the appellant are actual trades. All the deals have been executed on the screen of the Exchange in the price and order mechanism of the Exchange which has been permitted by the respondent.  Under the anonymous system of matching trades Cross Deal could not be avoided when a member was operating at multi locations on several terminals. As such cross deals could not be treated as artificial or dubious trades. Moreover there was no violation of the basic principle laid down for cross deals.  It was further submitted that cross deal of even 18500 shares against the floating stock of more than 53 lakhs would not have any impact on the investors and the market.

15.             The learned counsel for the appellant submitted that the link between Share Plaza, Sanchit and the appellant was established on the basis of addresses of all the three parties taken to be the same.  He pointed out that in spite of repeated request by all the three parties and producing evidences of separate addresses the respondent had continued with the charge. In fact all the three parties are having different addresses and there was no need to link the trades with these parties as the artificial trades. He went on to argue that cross deals or synchronized deals could not be considered as an offence unless they have the effect of manipulating the market. He cited the case of ICICI Brokerage on synchronized trades of GTB in which it was ruled: “synchronized deals are not per se illegal unless they have the effect of manipulating the market”.  He also cited the case 206 of 2004 of Indsec Finance Ltd.Vs. SEBI where it was mentioned “it is not possible to punish one side while exonerating the other”. He also cited the order of the Tribunal in appeal 242 of 2004 in the case of S.S.Corporate Services Ltd where it is held:

“Since al the transactions were screen based and insignificant, no nexus was with K P. Entities, and considering the price were as the prevailing price, we don’t find any case has been made out to find the appellant guilty of violating FUTP regulations or the code of conduct as alleged by the respondent.”

16.             The learned counsel rebutted the charge that appellant received funds from Eider Financial Services Limited, a group company of EIL during the period for manipulation of price of EIL shares.  He submitted that the appellant did not receive any fund from the EIL and or from its associates. The charge was that DDs were issued infavour of NSL from funds received from Eider Financial Services as mentioned in a letter dated 10/01/2002 by IndusInd Bank Limited addressed to the respondent. The letter of the bank confirmed that the drafts were issued by their Chandigarh bank branch and they were drawn in the name of NSL and none of the drafts were received by them for cancellation. However, the same bank issued two letters dated 25/06/2003 and in response to the appellant’s letter to the bank of 04/09/2004 they confirmed that the second letter dated 25/06/2003 No. CHD/IBL/2003 related to details of 7 DD’s was in substitution of their earlier letter dated 25/06/2003.  Finally vide their letter dated CHD/IBL/2004 dated 21/11/2004 the Bank clarified that all the 7 DDs were not issued in favour of NSL, the 3 DDs were from Shri Devender Singh, who made payments of his dues for dealing in the various scrips. 

17.             The learned counsel rebutted the charge that NSL had placed trades of one share at the circuit breaker limit and also done cross deal of one share each at successively higher rates. 

18.             The learned counsel submitted that the appellant was not responsible for sharp rise in the price of the scrip.  The most important factor for price during the second half of 1999-2000 was an unprecedented boom in the tech., media and telecom sector all over the world which resulted in the buoyancy in the price of all the tech stocks. EIL was also a stock in the same category, which was earlier Eider Telecom Limited which changed to Eider Infotech Limited. He also pointed out that the suspension of registration for six months would be disastrous to the company.  It would adversely affect the business and it may also adversely affect the employees working with the company. He submitted that in similar cases only warning has been given by SEBI itself. In the case of Mahesh J. Doshi, Member of Stock Exchange Mumbai in the matter related to Morpen Hotels Limited, by order dated 28/10/2004 the Whole Time Member  has observed as follows:

“19.             Given the above context, and considering also that the entities who had generated volumes in the scrip, had transacted through several brokers, making it difficult for the concerned brokers to easily detect any suspicious trading activity, it does not appear to be fair to assume that the broker, without undue difficulty and with ordinary diligence, would have been in a position to readily zero-in on or segregate the transactions of the said clients and quickly establish their suspicious nature. Hence, I am of the view that suspension of certificate of registration granted to the said broker, for a period of two months, would be excessive. Given the circumstances, imposition of a penalty of warning would be adequate to meet the ends of justice.

ORDER

“20.     Therefore, in exercise of the powers conferred upon me by virtue of Section 19 read with Regulation 13(4) of SEBI (Procedure For Holding Enquiry By Enquiry Officer and Imposing Penalty) Regulations, 2002, I hereby pass an order issuing a warning to Shri Mahesh J Doshi, member, BSE, to the effect that the broker should be careful in future and exercise due care and diligence in the conduct of its affairs as a capital market intermediary. I also direct the broker to note that any instances of violations or non-compliance of the Securities and Exchange Board of India Act and the Rules and Regulations, in future, shall be dealt with stringently.”

SEBI has taken similar view in the cases of GSB Capital Markets Ltd., Bhupendra Meghni Bheda and Shilpa Stock Broker Pvt. Ltd.

19.             The learned counsel for the appellant also relied on a judgment of the Tribunal in Chona Financial Services Pvt. Ltd., in appeal No. 95 of 2003. In the case of Chona Financial Services Pvt. Ltd., the Tribunal has extracted the orders rendered by SEBI and SAT and the nature of penalty which are extracted below:

“The appellant submitted a few cases namely M/s. Bakliwala Investment, J.M. Morgan Stanley Retail Services Pvt. Ltd., Bama Securities as under, which have been found to contain by and large similar irregularities and have been only served with a letter of warning by SEBI.  

a)                 M/s. Bakliwala Investment

Irregularities

Ø           Provision for Tax for the interim period from April 1 to September 30, 2000 not made

Ø           Confirmations have not been obtained from Banks, Creditors and debtors by the broker.

Ø           Broker had not time stamped the order slip/records

Ø           Contract notes not serially numbered except for computer generated numbers on day-to-day basis which have no control.

Ø           Contract notes not issued within the specified time.

Ø           Consolidated stamp duty not paid.

Ø           Client Registration forms were not completed

Ø           Order book was not maintained.

Ø           Delay in payment of funds

Ø           Delay in delivery of securities

Ø           One client account being adjusted against another client without any authorization

Ø           Transactions with associate firms/companies separate set of ledger accounts as clients and others not maintained.

Ø           Compliant register not maintained.

Ø           Client account were used for other purposes

Ø           Margin money not collected

Ø           In 10 cases, deals were done outside the NEAT System

Order

Ö     Irregularities are basically technical lapses and do not deserve a substantive punishment.

Ö     Minor Penalty – Warning

 

b)                 M/s. J.M. Morgan Stanley Retail Services Pvt. Ltd.

Irregularities

Ø     Failure to obtain client registration forms and agreement

Ø     Failed to maintain separate client account.

            Order

                        Warning

c)                 M/s. Bama Securities

            Irregularities

Ø     Contract notes were missing

Ø     Acknowledgement from the clients not obtained

Ø     Not maintaining client registration forms

Order

            Warning

Reliance has been placed on a few other judgments as under in which similar irregularities were found and were served with a letter of warning.

d)                M/s. Ratanbali Capital Markets Ltd.

            Irregularities

Ø     Non-maintenance of books of accounts

Ø     Contract notes

Ø     Non-collection of margins from clients

Ø     Misuse of client’s funds

Ø     Share lending/borrowing

Ø     Non-segregation of clients accounts with own account and for not reporting off-the-floor transactions to Stock Exchange

Order

Warning

 

e)                 M/s. Twenty First Century Shares & Securities Ltd.

Irregularities

Ø           Non-maintenance of books of accounts

Ø           Delay in payment to clients

Ø           Misuse of client’s funds

Ø           Non-segregation of clients accounts with own account and for not reporting off-the floor transactions to Stock Exchange

Ø           Booking payment in different clients account.

Ø           Loan against shares of holding company and loan transaction in clients account.

            Order

            Warning

 

f)                  M/s. Sanjay  C. Bakshi

      Irregularities

Ø     Not maintaining margin registers

Ø     Dealing with unregistered sub-brokers

Ø     Not entering into agreement with few clients

Ø     Non-segregation of clients funds with own funds

Ø     Dealing with broker of other Stock exchange without getting registered as a sub-broker

Ø     Irregularities in respect of contract notes

Ø     Delay in payment/delivery of funds/shares to clients

          Order

            Warning

g)                 M/s. Mahesh Kothari Share & Stock Brokers Pvt. Ltd.

Irregularities

Ø     Non-maintenance of books of accounts

Ø     Dealing with unregistered sub-brokers

Ø     Irregularities in issuance of contract notes

Ø     Non-segregation of clients account with own account, misuse of client’s fund

Ø     Delay on delivery of securities and not reporting off the floor transactions

Order

            Warning

h)                M/s.  Mukesh Sawhany

Irregularities

Ø           Non-maintenance of document registers

Ø           Irregularities in issuance of contract notes

Ø           Non-maintenance of separate client account

Ø           Non-segregation of separate client account with own account

Ø           Not reporting off the floor transactions

Ø           Non redressal of investor complaints

Order

Warning”

20.             The learned counsel for the respondent vehemently submitted that the appellant had in fact contributed to the initial rise in the price of this scrip and also contributed to the high volume of trade during September, 1999 to March, 2000. It was an undisputed fact that the scrip was extremely active during the period for which investigation had been conducted. Nam Securities Limited, the appellant had executed trades in the scrip of EIL so as to create an artificial liquidity in the market and at the same time managed to increase scrip price to high levels. NSL was the top member who had traded in the scrip of EIL.  Share Plaza, a registered sub-broker of NSL had dealt through different trading members.  NSL and M/s. Sanchit Management and Financial Services constituted a major part of total volume traded at NSE during the period under consideration.  NSL had executed buy as well as sell orders at the same time resulting into cross trades. In some of the cross trades which were executed by NSL it appeared that NSL were appearing as both the buy and sell members for the relevant transaction.  NSL had placed the buy order at a higher price even when shares were available at lower price thereby influencing the price.  By placing such orders at the beginning of the market trading hours NSL established higher trade price for the day. NSL executed series of synchronized transactions with other brokers with the intention to influence the price of the shares of EIL. He submitted that the manner of placing buy orders at higher rates at the circuit filter limits without any change in economic fundamentals of EIL and also at a time when shares were available at lower rates resulted in creation of artificial trades and jacking up the price.  This got aggravated by the fact that trading volume in the scrip were low. NSL received funds from Eider Financial Services, a group company of EIL. A communication dated 10/01/2002 was received from M/s. Indusind Bank, Chandigarh giving the details of the amount and the nature of instrument and also in favour of whom the demand drafts were issued. The communication established clearly the transfer of funds from Eider Financial Services Limited to the account of NSL. NSL submitted a letter which contradicted this information. The letter obtained by SEBI at the time of investigation was in complete agreement with the details of funds transferred to NSL account.  He submitted that the contradictory letters which were submitted by NSL could not be admitted and accepted as they lacked the credibility.  In view of the above all charges against the appellant stand proved and therefore the impugned order should be upheld in toto.

21.             We have heard the counsels for the appellant and the respondent and we have also gone through the documents and papers pertaining to this case. From the perusal of the documents and from the submissions made by both sides, we find that it is an undisputed fact that the price of the scrip of EIL rose sharply and the trading volume also increased substantially. It is also a matter of fact that NSL was one of the top trader of the scrip. It has been contended by the appellant that out of the total volume of trading in this scrip the share of NSL was not very significant.  It is also been contended that during the period there was a boom in the technology stocks and there was heavy movement of price and volumes in tech stocks.  Eider being a tech stock was also affected by the sectoral boom in the market. It is true that partly the increase in the price of the scrip could be attributed to the market perception about technology shares and various steps being undertaken by the company such as its diversification plans in infotech, major collaboration plans, acquisition and takeover plans proposed issue of further capital as resolved in the company’s annual meeting held on 30^th September, 1999 which also got reported in the newspapers. 

22.             It has been admitted by the appellant that it was participating in the auctions since 1995.  The auction quantity of 1000 shares was over a period of 7 months. It was a small amount compared to the total deliverable quantity of over 1,25,500 shares. We find that all the charges that have been leveled against the appellant in the impugned order have to be seen in the light that volume of trade by the appellant was comparatively small and insignificant. The only important charge in the impugned order was about the diversion of funds from the associate company of EIL for increasing the price and volume of trade by the appellant. The impugned order contains a reference to the letter dated 10/01/2002 from M/s. Indusind Bank. This letter states that 10 Demand Drafts were issued in favour of NSL. This was however, contended by the appellant and they submitted letters dated 4^th September, 2004 and 20^th November, 2004 stating that Indusind Bank had not issued DDs in favour of NSL in other seven cases and in three cases the demands drafts were issued because of payment received from another client Shri Devender Singh towards settlement of the account of NSL. There is no other document on record contradicting the clarificatory letters received from Indusind Bank, Chandigarh branch addressed to the appellant. The respondent could not prove this charge though it left some doubts in the mind.  In view of above it could not be concluded that there was a transfer of funds from Eider Financial Services to NSL.

23.             The appellant at his request had been given an interim stay on 08/09/2004 restraining the operation of the impugned order till 10/10/2004 which was subsequently extended till the disposal of the appeal. Therefore the appellant has not suffered so far on account of this impugned order.

24.             We have also taken into account that the appellant has large number of employees and clients. Suspension of certificate of registration for a period of six months would adversely affect his business and the career of its employees. In view of the facts and circumstances of the case, we therefore uphold the impugned order of the respondent but modify it by reducing the suspension of certificate of registration from six months to two days. The suspension will commence from the date of receipt of this order for two working days of the market.

25.             Appeal disposed of accordingly. No order as to costs.

 

 

 

Place: Mumbai

Date:   18/11/2005

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